What is the definition of an indirect cost?

The definition of an indirect cost refers to expenses that are not directly attributable to a specific product or service but are necessary for the overall operation of the business. These costs are incurred to support the production process or business activities as a whole rather than a particular item, which aligns with the concept of being shared over many units of production.

For instance, when a factory incurs costs for utilities, rent, or depreciation on equipment that is used for multiple products, these expenses cannot be traced back to any one item. Instead, they spread out across all products manufactured, which is typical of indirect costs. This understanding is fundamental for businesses aiming to allocate costs properly in financial statements and performance evaluations.

In contrast, costs that can be easily traced to a specific product fall under direct costs, while costs tied specifically to direct labor are also considered direct costs. Costs that vary directly with production would be classified as variable costs, which can exist in both direct and indirect categories depending on their traceability.