Definition: For a cost object, an indirect cost are those costs that cannot be linked to a specific object, job, customer, or process directly. In other words, they are costs that do not increase in direct proportion with increasing cost objects.
What Does Indirect Costs of a Cost Object Mean?
What is the definition of indirect cost of an object? In an organization, a cost object is anything for which a cost can be allocated. Examples of cost objects include but are not limited to clients, functional departments, goods that are produced, and services rendered by the business. When determining how costs in a business will be assigned, direct costs are easy to assign because they have a direct relationship to the cost object. For indirect costs of a cost object, however, it must be determined how these costs will be split up since they are not directly tied to the cost object.
Indirect costs are assigned to a cost object using different methods. These include activity-based costing, proportional allocation, and cost rate allocation. Most of these methods include looking at an indirect cost pool and determining how much of the pool should go to each cost object.
Let’s look at an example.
Mr. Scout is the CFO of a mid-sized law firm in Florida. His has many clients, and while it is simple to determine the allocation of some costs, the indirect costs are more challenging for him to assign. Which of the following costs are considered indirect costs?
- Attorney labor hours
- Secretary’s salary
- Rent of the building
- Travel expenses
- Internet expense
Attorney labor hours, travel expense, and postage are likely directly charged to the cost object (the client). However, the secretary’s salary, rent, and internet expense do not increase directly with the cost object and are therefore indirect costs for the cost object.
Define Indirect Costs of a Cost Object: This means the expenses that cannot be traced back to a production process.