Indirect Costs


The financial accounting term indirect cost is used to describe all costs other than initial direct and direct costs.  Typically, indirect costs do not have a clearly attributable relationship to a product or a service.  Indirect costs can include selling, general and administrative expenses, advertising, insurance, and taxes.


In the accounting profession, indirect costs are those that are not directly assigned to a cost object (project, product, or service).  Instead, they are typically allocated to multiple cost objects.  For example, income taxes can be allocated based on EBIT, while SG&A might be allocated based on revenues or direct labor hours.  Generally, indirect costs fall into two subcategories:

  • Fixed Costs: includes those activities that do not vary with output.  Examples include facility rents, property taxes, warehousing, insurance, and executive salaries.
  • Variable Costs:  includes those activities that vary with output.  Examples include transportation and shipping expenses.

While both fixed and variable costs can also be directly attributed to a single cost object, the distinguishing characteristic of an indirect cost is the need to assign it to multiple products or services using an allocator.

Indirect costs should always be charged to expense as incurred, regardless of the revenue recognition method used for a particular transaction.

Related Terms

service transaction costs, direct costs, initial direct costs