Indirect expenses are expenses other than direct expenses. These refer to those expenses which cannot be directly, conveniently and wholly allocated to cost centers or cost units. E.g. factory rent & insurance, power, general repairs etc.
Nature of Indirect Expenses
Indirect costs are “those which are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular cost unit/cost centre.
A few examples of such expenses are as follows:
- Rent, rates and insurance of factory and office.
- Depreciation, repairs and maintenance of plants, machinery, furniture, building etc.
- Power, fuel, lighting, heating of factory and office.
- Advertising, legal charges, audit fees, bad debts, etc.
Expenses excluded from costs
The following types of items are not included in cost of production or sales:
- Matters of pure finance including interest paid and received, dividend received on investments, rent received, profit or loss on sale of investments or company’s property, transfer fees received etc.
- Appropriation of profits including income-tax paid, dividends paid, transfer to sinking fund, general reserve, excessive depreciation, goodwill or other fictitious assets written off, etc.
Notional Expenses
Expenses that are usually incurred should be included in costs even if a particular firm is not required to pay for such expenses. Rent for own premises is an example. If a firm occupies its own buildings, it does not pay any rent for this, but for costing purposes, an appropriate amount of rent should be included in costs.
Accounting Treatment of Indirect Expenses
Indirect expenses may or may not be allocated. For example, office administrative costs are indirect expenses, but are rarely allocated to anything, unless it is corporate overhead and is being allocated to subsidiaries. These types of indirect expenses are charged to expense in the period incurred. Indirect expenses that are factory overhead will be allocated to those units produced in the factory during the same period that the indirect expenses were incurred, and so will eventually be charged to expense when the products to which they were allocated are sold.
