Indirect cost
An indirect cost cannot be traced economically and in full to the cost object being measured. It is assigned using an appropriate allocation or apportionment process where a full cost is needed. Factory rent shared by products is production overhead; head-office administration is normally non-production overhead. Indirect costs can be fixed or variable. The classification reflects traceability rather than whether the business ultimately recovers the cost through prices.
Worked example
A factory’s $12,000 rent supports three production departments. Apportioning it using their floor areas assigns the shared cost; it does not turn the original cost into direct material.
Common mistake
An allocation base can give a useful estimate but does not prove that each product caused that share of the cost.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | MA | Direct | September 2026–June 2027 |
| FIA | FMA | Direct | September 2026–June 2027 |