Indirect cost is what? Classification, calculation and practical application

In the process managed/operated business, understanding the types of costs is the key element to ensure the effective and sustainable finance. One of the aspects vital but often overlooked is the cost indirectly. So indirect cost what is? Let's Accnet read the article below to clarify on the issue!

1. Indirect cost is what?

Indirect costs (costs not directly) are those costs not directly related to product/service specific business production/supply. 

These are expenses not allocated directly to each unit of product/service specific. Instead, the cost is not directly often must be allocated based on the methods of calculation or by a percentage.

2. Types of indirect costs most popular today

Here are some of the costs not directly but businesses often encounter:

2.1. Cost management

• The account of salary, bonus, allowances for positions such as ceo, the senior management.
• Office rent, telephone, internet, water, materials office products.
• Organize meetings, conferences and seminars for leadership/staff management.

2.2. Indirect costs for marketing/advertising

This cost is related to the operations marketing/advertising products/services of the business:

• Advertising on tv, radio, newspapers, magazines, network sites.
• Organization of promotions, advertising campaigns to attract customers.

2.3. Indirect costs for research and development (R&D)

This cost includes expenditures for research/product development, new services or improvements to existing technology:

• Salary, bonus and allowance for scientists, engineers, research staff.
• Shopping research equipment, software, registration costs, maintain patent rights.

2.4. Administrative expenses

Administrative costs are the indirect costs to maintain the overall activities of the business, including:

• Rental protection outside the company, procurement of security equipment.
• Hire, reception services, office support, such as janitors, sanitation services.

2.5. Maintenance cost system supplies/auxiliary

This cost is the account system maintenance machinery and equipment, infrastructure of the enterprise:

• Maintenance and repair of machinery and equipment to ensure they are operational stability.
• Procurement of supplies, auxiliary such as oil, construction materials, office materials.

2.6. Indirect costs for delivery/shipping

Used to distribute/transport products of the business to the customer:

• Shipping products from warehouse to the customer, the cost of renting warehouse to store goods.
• Preservation of the product during transportation such as cargo insurance, the cost of protective packaging products.

2.7. Cost of customer support after the sale

The cost of this to support customers after they have bought the product/service of the business:

• Warranty and repair products when there is technical error.
• Provider of consulting services, customer support, after they buy the product.

3. Guide how to calculate indirect cost effective 

To calculate the cost not directly correct, you can apply the following steps:

Step 1: Determine the type of indirect cost and collect data

First you need to determine the type of expense not directly that the business faced. The types of expenses which may include:

• Cost of administration.
• The cost of marketing/advertising.
• The cost research/development.
• Shipping costs/delivery.
• Maintenance cost system supplies/backend.
• Cost of customer support after the sale.

Collect the source of information related to calculation of costs not directly include financial statements, management system, the existing cost of the business, the report business activities.

Step 2: Select the method for allocating indirect costs

There are many methods to allocate costs not directly, such as:

• Method percentage of sales: Allocation of costs not directly based on percentage revenue each product/service. For example, if the total cost does not directly is 20% of the total revenue, costs not directly of each product/service will be 20% of sales from that product.

• Method number of units: Allocation indirect costs based on the number of units of product produced or service provided. For example, the cost is not directly can be divided evenly for each product/service according to quantity.
• Standard method: Allocated based on the criteria/indicators to be determined first. These standards are the rules of business set out according to experience/historical data about the cost.

Step 3: Calculate indirect costs, and monitor/adjust

Calculate the cost not directly for each product/service on the allocation method selected. 

If you apply the method percentage of sales, costs not directly is 20% of the total sales revenue of a product is 100 million, the cost is not directly for products that will be 20 million.

After the calculation, you need to monitor and evaluate the results to ensure fairness in the allocation of costs not directly, help you make the necessary adjustments over time.

4. The difference between direct costs and indirect costs

The comparison table below will help you understand more about the basic differences between direct costs and expenses not directly in business:

Characteristics	Direct costs	Indirect costs
Definition	Be allocated directly to each unit of product/service specific	Not allocated directly to each unit of product/service
Related to	Directly related to product/service specific	Related to the overall operation of the business, not just specific for each product/service
Allocation indirect costs	Direct allocation based on product units	Allocated based on the calculation method or percentage
Management	Easy to manage because that is assigned to each unit of product	Requires calculation method is accurate to allocate the right level for the different activities of the business
Efficiency measurement	Easily measure the effectiveness	Difficult to measure the effectiveness depends on many different factors
Purpose of use	Calculate the product price, profit, direct	Calculate the total operational costs, business optimization costs overall

5. Practical application of the cost not directly

Here are some practical application of understanding indirect costs:

• Budgeting, financial forecasting, helping businesses avoid the cost exceeds the budget or lack of financial resources.
• Calculate the price of products/services exactly to offer a price matching guarantee a profit competition in the market.
• The area has a high cost, find ways to optimize operations. If the cost of administration is too high, the business can review the organizational structure, work processes to minimize cost.
• Evaluate the effectiveness of the strategic business/marketing by comparing the costs not directly with the revenue/profit

The allocation is not reasonable, the type of indirect cost can lead to deviations in the calculation of the price of the product, making it difficult for the pricing reasonable, optimize profits. From the cost management management and marketing, to the cost of after-sales support, businesses need a solution to manage more comprehensive to ensure good control of costs not directly.

With AccNet Cloud HKDevery stage management indirect costs has become easy. Software business support track/allocation of costs not directly in a flexible way, to help you ensure the account detail is strictly controlled, from which optimize profitability, which not miss any factor affect the financial business. Choose the right AccNet Cloud HKD to overcome the barriers in the management of indirect costs, enhance financial performance for your business!

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Article on business will understand indirect cost what is and the important role of it in business operations. The application of the method of calculating costs not directly justified will help business achieve the effect of financial expansion, growth opportunities in the business environment increasingly competitive today.

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