Indirect cost
Indirect cost is a cost that cannot practically be traced to a single cost object and must be assigned to it through an allocation base or driver. Factory electricity powering multiple products is a typical example.
Also known asindirect costs
See it move
A tree diagram places a single shared cost pool at the root and branches it into three cost objects — Product A, Product B, and Product C — each receiving an allocated share of the pool. Because no product is solely responsible for the shared cost, the firm must choose an allocation base (such as machine hours or floor space) to apportion the total. The branching structure contrasts indirect allocation with the direct tracing that would apply if the cost could be tied to one object alone.
Check yourself
A factory produces three models of chair on shared production lines. Which of the following is best classified as an indirect cost with respect to a single chair model?