Indirect expenses are an accounting concept that can be hard to grasp. So what is an indirect expense, and why do you need to know about it?
The definition of an indirect cost is simply a cost that cannot be assigned directly to any activity or product. In other words, it’s a cost that can’t be easily or directly traced back to a specific expenditure. For example, if the company that makes your favourite cereal suddenly increases its advertising budget by 10 million rupees, the company will likely see increased sales for this cereal. However, it could not attribute the 10 million rupees increase in sales directly to its advertising budget because it doesn’t know which customers came from this ad campaign, and which customers came from word of mouth recommendations by friends and family members.
Companies need to keep track of indirect expenses list because they tend to be much more variable than direct costs. See more. The company that produces your favourite cereal may have significant costs associated with running its factory — but those costs are generally stable, year after year. If the company doesn’t track its indirect expenses, then it might end up grossly overspending on advertising for one year, which could lead to financial difficulties at the end of the year when they don’t have enough money left over after their direct costs
Common examples of indirect costs:
● Depreciation Expenses: The number of depreciation expenses is the value of the depreciation costs which includes the value of the buildings, land, furniture and equipment. Depreciation is one of the indirect costs which is a fixed expense.
● Rent Expenses: The number of rent expenses is the value of rent charges for renting office space in different branches.
● Taxes: The amount of taxes is the value of taxes which includes income tax, capital gains tax and local taxes. For calculating these you need to be aware of the history of GST rates and other tax related rates for an accurate picture.
● Insurance: The amount of insurance is the value of insurance which includes fire insurance and burglary insurance.
● Advertising Expenses: The amount of advertising expenses is the value of advertising costs which include promotional gifts, newspaper advertisements, website maintenance and brochures.
● Salaries to Management: The amount of salaries to management is the value of salaries paid to employees who are part of running or managing a business or an organization.
● Commission paid to Agents: The amount of commission paid to agents is the value of money given as a reward to agents who are responsible for selling goods or services offered by a business or an organization.
● Telephone Bills: The number of telephone bills is the value of telephone charges including local calls and long distance calls.