If you need assistance with breaking down your business’s expenses, contact a professional accountant or choose accounting software that can support your business. An indirect cost is any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. After direct costs have been determined and charged directly to the contract or other work, indirect costs are those remaining to be allocated to the several cost objectives.
PepsiCo, Inc., produces more than 500 products under several different brand names, including Frito-Lay, Pepsi-Cola, Gatorade, Tropicana, and Quaker. Net sales for 2010 totaled $57,800,000,000, resulting in operating profits of $6,300,000,000. Cost of sales represented the highest cost on the income statement at $26,600,000,000. The second highest cost on the income statement—selling and general and administrative expenses—totaled $22,800,000,000.
Direct costs
These expenses are usually not included in the direct costs of construction, but they still impact the project’s final cost. When they purchase a new lawnmower to help with indirect costs are also referred to as costs. their work, that’s a direct cost because it’s directly tied to the service they provide. On the other hand, they may be required to take out employee liability insurance.
For example, to create a product, an appliance-maker requires steel, electronic components and other raw materials. Two popular ways of tracking these costs, depending on when your company uses materials in production, are first-in, first-out and last-in, first-out, also known as FIFO and LIFO. LIFO can be helpful if the costs of your materials fluctuate in the course of production. Generally, indirect cost rate structures for commercial organizations follow a single, two-rate (for example, fringe and overhead rates), or three-rate (for example, fringe, overhead, and General and Administrative expense rates) system. For purposes of forecasting, indirect costs like insurance, rent, and employee compensation tend to be more predictable compared to direct costs.
7: Cost Terminology
Cost allocation is the process of distributing your indirect costs among specific departments or projects. Fixed costs are incurred regularly and are unlikely to fluctuate over time. Examples of fixed costs are overhead costs such as rent, interest expense, property taxes, and depreciation of fixed assets. It is possible to justify the handling of almost any kind of cost as either direct or indirect. Labor costs, for example, can be indirect, as in the case of maintenance personnel and executive officers; or they can be direct, as in the case of project staff members. Similarly, materials such as miscellaneous supplies purchased in bulk—pencils, pens, paper—are typically handled as indirect costs, while materials required for specific projects are charged as direct costs.