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Indirect Costs

DAU GLOSSARY DEFINITION

A category of indirect costs that supports a specific part or function of a company, but not the entire company. Overhead costs support multiple cost objectives. Common examples include material handling, supervision, production control, and manufacturing.

Alternate Definition

Indirect costs are costs that, because of their incurrence for common or joint objectives, are not subject to treatment as direct costs. They are not directly identified with a single final cost objective, but rather with two or more final cost objectives or with at least one intermediate cost objective.

General Information

Indirect costs include support costs for continued operations. There are two categories of indirect costs— overhead, and general & administrative.

 

  1. Overhead costs support a specific part or function of the company rather than the whole company. Examples include the cost of factory maintenance, material handling, and worker fringe benefits, all of which can be shared proportionally among specific manufacturing jobs.
  2. General and Administrative (G&A) costs are required to support operation of the entire company. Examples include the salary of the Chief Executive Officer, pension administration costs, and the operation of the Human Resources office.

 

Indirect Cost Rates

 

An indirect cost rate is expressed as a ratio between a numerator and a denominator. The indirect cost rate is the percentage or dollar factor that expresses the ratio of indirect expense incurred in a given period to direct labor cost, manufacturing cost, or other appropriate base for the same period, e.g.:

 

Indirect Costs, Figure 1.

 

There are three types of overhead rates to consider. Forward pricing rates are developed for pricing and negotiating proposed contracts and modifications to existing contracts. These rates represent estimates of anticipated future indirect costs. Billing rates are used by contractors to obtain payment for indirect costs during contract performance. During each cost accounting period, the billing rates should become more accurate as more actual cost data become available. They are used in contracts that provide for interim payments based on actual costs incurred. Final (or “actual”) rates are negotiated at the conclusion of the contractor’s fiscal year to arrive at final allowable indirect costs, and are typically not subject to change. They are established after the close of the contractor’s fiscal year/cost accounting period to which they apply (unless the parties agree on a different period).

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