Indirect costs are necessary for the operation of a business. Indirect costs include things like office technology, rental equipment, marketing campaigns, supplies, and accounting services. When you know the true costs of both your indirect costs and your direct costs, you can then properly price your products or services for a profit. Indirect costs can be both variable and fixed.
Indirect Variable Costs and Indirect Fixed Costs
Indirect variable costs are not directly related to the product or service. They're in proportion to how the total output fluctuates. An example of this is the power cost at a factory. If you increase production, the power costs increase. It's tough to determine how much the cost increases for each product. Hence, it is known as an indirect variable cost. Indirect fixed costs do not vary with a change in the output. An example of this would be the cost of salaries.
The Indirect Cost Pool
A cost pool has indirect costs that are allocated to specific projects and are dependent on the indirect cost rates. Examples of an indirect cost pool include labor, equipment, and vehicles. To track the cost of a cost pool, a company must make sure that the costs are specifically indirect costs and not direct costs. Indirect costs must be established consistently. The indirect cost rate must be known. Rates include things like equipment usage hours, direct labor costs, and direct labor hours. These should be matched to the cost pool.
How Indirect Costs are Determined
An indirect cost proposal should identify all activities carried out by different departments. All activities must be included. These costs are then identified as either indirect or direct. It is important not to confuse indirect costs with direct costs.
Knowing your direct and indirect cost is important for a company. It helps you better understand your service or product. This can help you engage in better competitive pricing and more profit. In addition, you'll have a better idea of your accounting and can better plan for the future of your company. Knowing both you're injured and the direct course is also important when it comes time to file your yearly taxes. Some indirect and some direct costs are tax-deductible. Indirect costs that are taxed deductible may include, insurance costs, utilities, and rental payments. Direct costs that may be tax-deductible include repairs to any of the equipment that you use in your company. Every company situation is different. If you have any concerns, just consult an accountant. They can advise you which cost qualifies as tax-deductible.
Just keep in mind that the rules regarding indirect costs and direct costs impact your company, especially when it comes to funding. External grants like government grants are very important. Grant rules are very stringent about the funding that they allocate for a direct cost or an indirect cost.
If you are not sure how to calculate your indirect costs and direct costs, consider hiring an accountant or partnering up with a financial company. There are many companies out there who will assist you with this task. This will help you with budgeting and tax season. You can outsource this type of financial service. You'll also find that there are different packages that these companies offer. It's easy to find one that meets your budget.