Indirect Cost
Expenses that are not directly traceable to a specific cost object, such as a particular product, service, or project.
These costs are necessary for the overall operation of a company but cannot be directly allocated to the goods or services produced. Examples of indirect costs include administration expenses, rent, utilities, and salaries of employees not directly involved in production. Unlike direct costs that can be directly associated with production, indirect costs require allocation methods to assign a fair share of the cost to various cost centers or departments.
Recognizing and effectively managing indirect costs is essential for comprehensive cost accounting and financial analysis. They are significant when determining the total cost of production and setting prices that ensure profitability. Proper budgeting and monitoring of indirect costs are critical for maintaining operational efficiency and enhancing a business's overall financial health.
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