The cost of supplies, utilities, and the rental of office equipment, desktop computers, and mobile phones are indirect costs. Indirect costs can be either fixed or variable, just like direct costs. Expenses such as rent fall under the category of fixed indirect costs, while variable indirect costs include expenses that are subject to change, such as those for electricity and gas.

Indirect expenses aren’t the only costs you will have at your business. You will also have direct costs, which are expenses you can assign to the production of a specific product or service. Please note that any subcontractors also must adhere to the sponsor-specific restrictions on indirect costs that NC State honors. It is classified as an overhead and refers to the expenses that cannot be traced directly to specific products or services. Rent payments, utility bills, and certain insurance premiums are indirect costs that might be tax deductible.

Fixed vs. Variable Costs

Overhead cost, maintenance cost and other fixed costs are typical examples of cost pools. A company usually uses a single cost-allocation basis, such as labor hours or machine hours, to allocate costs from cost pools to designated cost objects. Most cost estimates are broken down into direct costs and indirect costs. While there are certainly exceptions to the rule, the majority of direct costs are recorded under the cost of goods sold (COGS) line item while indirect costs fall under operating expenses.

These fringe benefits are applied to direct salaries charged to projects either through a fringe benefit rate or as part of an overhead/indirect cost rate. Therefore, fringe benefits treated as indirect costs should not be included as a direct cost in the “Personnel” category of the budget form of the grant application or on a contract proposal. Indirect costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Some indirect costs may be overhead, but other overhead costs can be directly attributed to a project and are direct costs. Other items may only be excluded when necessary to avoid a serious inequity in the distribution of indirect costs — and only with the approval of the sponsor. They are usually split into direct and indirect labor costs based on the worker’s contribution to production.

709 Penalties for Unallowable Costs.

(a) Consider the overpayment to have occurred, and interest to have begun accumulating, from the midpoint of the contractor’s fiscal year. Use an alternate equitable method if the cost was not indirect costs are also known as paid evenly over the fiscal year. For the exact rates to be used and for more information about rates for non-federal sponsors, please refer to the Office for Sponsored Project’s website.

To determine if a cost should be classified as either a direct or indirect cost, the question to ask is whether the cost is directly needed to create and develop the product/service. These expenses are shared across multiple projects or activities and are not directly traceable to a specific cost object or activity. The above expenses are considered indirect if they cannot be applied toward a single product or service. Office supplies, for example, are indirect if they are not direct materials to create products. Direct costs are the costs of doing business easily identified with a particular grant, contract, project function, or activity. Theoretically, costs like heat, light, accounting, and personnel might be charged directly if little meters could record minutes cross-cuttingly.

Indirect cost calculation and process

LIFO can be helpful if the costs of your materials fluctuate in the course of production. For example, if an employee is hired to work on a project, either exclusively or for an assigned number of hours, their labor on that project is a direct https://www.bookstime.com/articles/enterprise-resource-planning-erp-definition cost. If your company develops software and needs specific assets, such as purchased frameworks or development applications, those are direct costs. A cost pool is a grouping of individual costs, from which cost allocations are made later.

• However, if the employees are hourly and not on a fixed salary then the direct labor costs can increase if more products are manufactured.
• For businesses selling products, variable costs might include direct materials, commissions, and piece-rate wages.
• These costs cannot be directly attributed to a specific project or activity, but they are still necessary for the overall completion of the work.
• Often, funding for a specific project will largely support direct costs.
• Indirect cost accounts are monitored by the Office of Research and Sponsored Programs.
• The other are recurring indirect costs, which repeat for a particular company, like maintenance of records or the payment of salaries.