What Are Indirect Expenses? (Plus How To Calculate Them)

By Indeed Editorial Team

Published April 25, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Indirect expenses are those that aren't directly accountable to processes that contribute to the creation of products or services. If you work in business, finance or accounting, understanding different types of indirect expenses is important. Learning how to calculate indirect expenses can help you gain a holistic view of what your finances may look like and how to prepare for any incurred costs. In this article, we define indirect expenses, review different types, give you examples of these expenses and provide a guide on how to calculate indirect expenses.

Related: 8 Types of Business Expenses (And How To Record Them)

What are indirect expenses?

Indirect expenses are those that a company or organization incurs from daily business operations. You can't assign them to the cost or selling price of any products, programs or services. Indirect costs usually include those associated with insurance, rent, salaries and other expenses, such as bank charges, interest on loans and audio fees. You can't link a direct cost to a specific cost object, which is the main differentiator between direct and indirect costs.

There are two types of indirect expenses, including fixed indirect costs, which are non-changing, rigid expenses that a company incurs. The other type is recurring indirect expenses or variable costs, which are those a business pays on a recurring basis that may change based on different factors. A company typically incurs indirect expense costs by delegating its business operations from day to day.

Related: What Are Direct Costs? (With Examples)

Types of indirect expenses

There are several types of indirect expenses, including:

Business and administration indirect expenses

These refer to any costs associated with running a business and keeping it operational each day. These different expenses usually include the following:

Legal charges

Legal charges include a financial lender's right to gain ownership of a company's property if it doesn't pay the lender. Costs associated with the legal side of a business are indirect costs because they aren't involved with any type of production of a product, program or service. For example, you may pay court costs if you engage in a legal process to determine payment terms.

Salaries

Salaries refer to the amount of money a company pays staff for their work. The specific salary amount varies based on the role, experience and length of time at the company. A company may pay this indirect cost monthly, biweekly or semi-monthly.

Insurance

Insurance refers to the arrangement between a company and an insurer that provides financial protection for the company if certain circumstances arise. For example, a company may pay for liability insurance, fire insurance and rental insurance. These don't relate to any singular given cost object, so they qualify as indirect expenses. The cost of these expenses varies by company, level of insurance and insurer.

Rent, taxes and rates

Rent refers to the amount of money that a company requires to pay a landlord for using the office or warehouse space. This amount varies between companies and landlords, and you can find price and tenure details in the rental contract. Taxes and rates refer to the number of fees you pay to a municipality for servicing the property. The number of fees varies by the type of property and location.

Accounting and financial services

Any type of finance-related service is an indirect expense. For example, accounting, tax preparation and payroll are all considered indirect expenses. While they're critical to a company's ability to function, they're not usually directly connected to a singular, tangible cost object. You may outsource these services or complete them internally.

Related: What Is an Expense Report? (With Template and Example)

Sales and marketing indirect expenses

This type includes any costs associated with promoting and selling products, programs or services. Expenses in this group may range across many departments. They usually include the following:

Marketing

A company has advertising expenditures so it can increase item visibility and try to generate sales and maximize revenue. The amount of money associated with marketing expenses varies based on how much you market, how you market and what you're marketing. There isn't any one cost object you can associate with marketing and sales expenses.

Commission

A commission expense refers to any costs associated with paying an employee a certain amount for reaching a personal or company goal. These costs don't relate to any one cost object, so they're not considered direct. Commissions only pay out if an employee reaches their goal.

Supplies

Supplies expenses refer to any costs incurred in the creation, handling, packing and shipping process. You incur charges for these services as they occur. Supplies expenses refer to general office supplies, like tape, pens, boxes, notepads and shipping materials, which aren't associated with the actual production of a product or service.

Traveling

Traveling expenses refer to any costs incurred while conducting sales and marketing operations. You may incur these costs while driving to and from places to demonstrate products, sell ads or commute. Indirect traveling expenses may be reimbursable or non-reimbursable, and the nature of them varies by company.

Related: How To Track Your Small Business Expenses (With Tips)

Economic indirect expenses

These refer to costs associated with the economic health of a company. Economic indirect expenses often include external costs. This typically includes the following:

Auditing

Auditing expenses refer to any costs related to the auditing of a company. From time to time, companies may perform audits to gain an understanding of their health and financial standing. Companies may outsource auditing services or perform them themselves. Since auditing isn't a part of the production process, it's not considered a direct expense.

Loan interest

Loan interest expenses refer to the amount of money a company pays to a lender. A company usually agrees to pay a certain amount of money to a lender each month. The lender determines the amount based on a particular percentage of the principal sum. The amount many vary based on several factors and can change if certain circumstances arise. For example, if a company can pay more of their debt one month, they may choose to do this. As a cost unrelated to any type of manufacturing, loan interest expenses qualify as indirect expenses.

Amortization

Amortization expenses refer to payments a company makes to an entity over time. For example, you may use amortization to distribute a large cost, such as purchasing property, across months or years. The cost associated with amortization doesn't directly relate to a single cost object, and the specific amount paid can change, so it's an indirect expense.

Related: Expense Report FAQs

Other types of indirect expenses

Some indirect expenses may not fit in other categories but still relate to operating a business. This may include less tangible costs. These include the following:

Quality assurance

Quality assurance expenses refer to any costs associated with ensuring that the company offers high-quality products and services. A business may have an internal or external team review the quality of the product or the customer and technical support. Due to the range of items that quality assurance covers, it's not tied to a single cost object.

Facilities

Facilities expenses refer to any costs associated with a company's building costs. For example, paying for building maintenance is an indirect expense. These expenses are also variable as items like utilities charges may vary monthly based on how much water or electricity the company uses. Since using and maintaining a facility doesn't directly impact product creation, it qualifies as an indirect expense.

Related: What Is Indirect Cost? (Examples and Explanations)

Examples of indirect expenses

It can be helpful to view examples of what indirect expenses are, how they appear in a business context and how they may impact a business. Here are two examples of indirect expenses that may help you better understand this type of expense:

Example 1

A local real estate business signs a lease agreement for a property owned by a person who charges $3,000 per month in rent. This business formally agrees to rent the office space for a minimum of 12 months. The real estate business uses the space each day and pays its rent on time each month. The space doesn't create any specific product or service, so the rent amount qualifies as an indirect expense.

Example 2

A business owner has a small office space and uses both water and electricity. Each month, the amount of money the business pays for the water and electricity usage ranges from $500 to $750. This cost varies depending on how much water and electricity the business uses each month and the utility rates. These costs don't relate to producing any specific product, program or service, so they're indirect expenses for his business.

Related: What Are Business Expenses? Definition, Types and Examples

How to calculate indirect expenses

You can use these steps when calculating indirect expenses:

1. Determine total cost

Before you can calculate the indirect expense, determine how much the total cost is. This is the total amount of money involved in a certain project, task or activity. You can find this cost by considering all expenses incurred after a project completes. Once you determine all items that qualify as direct costs, you can set them aside or filter them out for this calculation.

2. Classify other costs

Next, you can establish which expenses qualify as indirect. You may also specify which costs are variable or fixed. Fixed costs include expenses such as indirect labor costs and rent, while variable costs may include quality assurance or marketing campaign expenses. Specific departments may have their own costs. For example, you might assign salaries for accounting staff to the accounting department's budget.

3. Add items

Once you determine what contributes to your total cost, you can add the indirect items together. You may separate the cost of indirect expenses by type to keep a record of which area costs more and what expenses may change. Add the total of each indirect expense type. This is your final indirect expense number.

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