What are Indirect Expenses?
Indirect expenses are those expenses that are incurred to operate a business as a whole or a segment of a business, and so cannot be directly associated with a cost object, such as a product, service, or customer. A cost object is any item for which you are separately measuring costs. Examples of indirect expenses are accounting, auditing, and legal fees, as well as business permits, office expenses, rent, supervisor salaries, telephone expense, and utilities.
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 considered period costs, and so are charged to expense in the period incurred.
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Examples of Indirect Expenses Included in Factory Overhead
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. Examples of items included in factory overhead are:
Production supervisor salaries
Quality assurance salaries
Materials management salaries
Factory rent
Factory utilities
Factory building insurance
Equipment setup costs
Equipment maintenance
Factory supplies
Factory small tools charged to expense
Direct Expenses
The reverse of indirect expenses are direct expenses, which are directly associated with cost objects. Examples of direct costs are:
