Indirect costs are costs used by multiple activities, and which cannot therefore be assigned to specific cost objects. Examples of cost objects are products, services, geographical regions, and customers. Instead, indirect costs are needed to operate the business as a whole. It is useful to identify indirect costs, so that they can be excluded from short-term pricing decisions where management wants to set prices just above the variable costs of products.
Indirect costs do not vary substantially within certain production volumes or other indicators of activities, and so are considered to be fixed costs.
Examples of indirect costs are:
- Accounting and legal expenses
- Administrative salaries
- Office expenses
- Telephone expenses
Indirect costs incurred in manufacturing operations are known as manufacturing overhead, while indirect costs incurred in the general and administrative area are known as administrative overhead.