Indirect costs

Indirect costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security costs. These are those costs which are not directly related to production. Some indirect costs may be overhead. But some overhead costs can be directly attributed to a project and are direct costs.

There are two types of indirect costs: overhead costs and general and administrative costs.

Overhead costs

Overhead costs are costs that are not directly tied to a specific activity. Examples of overhead costs include rent, utilities, and insurance. These costs are often time-related, such as interest or rents being paid per month, and are often referred to as overhead expenses. Overhead costs are often pooled and allocated to projects in a systematic way, such as by labor hours or machine hours.

General and administrative costs

General and administrative costs are costs that are incurred to manage and direct an organization, but are not directly tied to any specific cost object. Examples of general and administrative costs include executive salaries, legal fees, and some types of insurance. These costs are often allocated to projects based on an indirect cost rate.

Indirect cost rate

The indirect cost rate is a device used to determine what proportion of indirect costs each program should bear. The indirect cost rate is a ratio between the total indirect costs and some direct cost base. The indirect cost rate is calculated by dividing the total indirect costs by the direct cost base.

Indirect cost recovery

Indirect cost recovery (ICR) is a mechanism for recovering indirect costs associated with sponsored projects. The ICR rate is negotiated with the federal government and applied to the direct costs of sponsored projects.

See also

• Direct costs
• Cost object
• Cost pool
• Cost allocation
• Cost driver