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Indirect Cost: Definition and Meaning
Definition
An indirect cost is a cost that supports multiple activities and cannot be easily assigned to one specific product, project, service, or customer.
Why It Matters
Indirect costs are important for budgeting, pricing, profitability analysis, and overhead management. Because these costs support the business broadly, companies may use allocation methods for internal reporting or job-cost analysis.
The appropriate allocation method depends on the business’s operations and reporting needs. It should be consistent, reasonable, and understood by management.
Example
Office rent may support all projects and departments, making it an indirect cost rather than a cost of one particular job.
Related Terms
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