What Are Indirect Costs? - Definition & Examples

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  • 0:02 Indirect Costs
  • 1:32 Vary by Company
  • 2:24 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield

Tara has a PhD in Marketing & Management

This lesson explains what indirect costs are and how they affect a business. Examples of indirect costs and how they can vary in different businesses are given.

Indirect Costs

Indirect costs are expenses a company may incur that are not associated to a specific product or project within a company. These costs may also be called administrative expenses or overhead costs.

Imagine that you are a manager for a small business that provides bottled water to local companies. As you review the monthly invoices, you find many invoices for expenses that have nothing directly to do with water bottling or distribution. However, these are expenses that are important to the operation of your business.

For instance, you notice your office supplies are quite high, especially printer paper. As you inquire, you find that the computer software your company uses for accounting uses standard printer paper when generating customer invoices. These invoices are sent to all customers to bill them for water deliveries. While the printer paper isn't directly tied to bottling or distributing water, it is critical to be able to bill companies for their service. The printer paper is an indirect cost to your company.

As manager, you can try to cut some of these indirect costs or reduce their impact. In a small business, indirect costs can be more easily identified and managed. However, in a larger businesses, it can be very difficult to understand which costs are necessary, if they are legitimate to the operations of the company and how they contribute to the success of the business. As a result, overhead or indirect costs can become excessive and may be unnecessary. Managing the indirect costs is an important part a manager's job.

Vary by Company

Indirect costs may be found in innumerable places within a business' accounting records. However, what may be a direct cost to one company could be considered an indirect cost to a different company.

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