What is an indirect cost?

Definition of Indirect Cost

An indirect cost is a cost that is not directly traceable to a cost object (product, department, etc.). Rather, the indirect cost is sometimes referred to as a common cost which is allocated to the cost objects in a logical manner.

Examples of Indirect Costs

For example, the depreciation of a company's manufacturing building is an indirect cost of the following:

  • The manufacturing departments within the building
  • The products that are manufactured in the building

The manufacturing building's depreciation may be first allocated to the manufacturing departments and then the departments' direct and indirect costs (including the depreciation) are allocated to the products that utilize those departments.

Manufacturing overhead in general is considered to be an indirect product cost which is allocated to the products manufactured during the year.

A charitable organization may have a salaried employee who works in three areas of the organization. This employee's salary is a common cost that will be allocated to the three areas.