Indirect cost
Learn what indirect costs are, see examples, and calculate and allocate them for your Indonesian business.
Published Wednesday 30 September 2026
Table of contents
Key takeaways
- An indirect cost supports your whole business rather than one product, service or project, such as rent, utilities, insurance and admin salaries.
- Separating direct and indirect costs helps you set prices that cover all your expenses and protect your profit.
- Your indirect cost rate is total indirect costs divided by an allocation base, such as direct labour hours or revenue.
- In Indonesia, documented indirect costs are generally deductible under the general tax regime, but they don't reduce the 0.5% final MSME tax.
What is an indirect cost?
An indirect cost is an expense that keeps your whole business running instead of supporting one specific product, service or project. The Corporate Finance Institute describes these as costs a company needs for its general operations and health.
Picture a bakery. The flour for your bread is a direct cost because you can tie it to one product. The shop rent benefits every item you sell, so it's an indirect cost.
Indirect costs are often called overhead costs or operating expenses. Once you know what they are, you can price and plan with a full view of your spending.
Indirect costs vs direct costs
Direct costs and indirect costs are two sides of your total business expenses. Telling them apart helps you price accurately and keep your records organised.
What are direct costs?
A direct cost is any expense you can trace straight to a specific product, service or project. If you stopped producing that item, the cost would go away.
These are the most common direct costs for a small business.
- Raw materials and supplies used in production
- Wages for staff who work directly on a product or project
- Shipping and freight for delivering finished goods
- Equipment bought for one specific job
How to tell them apart
One question sorts most costs: "If I stopped making this product or delivering this service, would this cost disappear?" If yes, it's a direct cost. If it would stay because it supports your wider operations, it's an indirect cost.
For example, a freelance graphic designer's design software is a direct cost if it's used only for client projects. Their internet bill is an indirect cost because it supports the entire business.
How direct and indirect costs compare
The two types also behave differently and appear in different places in your accounts. Here's a quick comparison.
- Direct costs trace to one product, service or job, while indirect costs support the whole business
- Direct costs usually rise and fall with output, while indirect costs are often fixed or semi-variable
- Direct costs usually sit in cost of sales on your profit and loss statement, above gross profit
- Indirect costs usually appear as operating expenses below gross profit
Types of indirect costs
Indirect costs behave differently depending on how much work your business is doing. Knowing each type helps you plan and budget with more confidence.
Fixed indirect costs
Fixed indirect costs stay the same however busy your business is. You'll pay these amounts in a slow month and in your best month.
These are typical fixed indirect costs.
- Office or warehouse rent
- Business insurance premiums
- Salaries for administrative staff
- Annual software subscriptions
Variable indirect costs
Variable indirect costs rise and fall with your level of business activity. The more you produce or sell, the higher they climb.
These are typical variable indirect costs.
- Electricity bills that grow with production volume
- Office supplies that run out faster in busy periods
- Maintenance and repairs that increase with equipment use
- Packaging materials shared across all your product lines
Semi-variable indirect costs
Some indirect costs have both a fixed part and a variable part. These semi-variable costs can be harder to predict.
For example, your phone plan might have a set monthly fee plus extra charges when your team goes over its data limit. A company vehicle has a fixed lease payment plus fuel costs that change with how often it's driven.
Overhead and general and administrative costs
Many businesses split indirect costs into production overhead and general and administrative costs. Production overhead covers the indirect costs of making goods, such as factory rent, factory electricity, machine depreciation and supervisor wages.
General and administrative costs cover running the business overall, such as office rent, accounting fees, business insurance and admin salaries. The split matters most if you hold inventory.
Indonesia's inventory standard, Statement of Financial Accounting Standards (PSAK) 14, was renumbered PSAK 202 from 1 January 2024. It's based on international standard IAS 2, under which inventory cost includes conversion costs such as production overheads, as the Deloitte IAS Plus summary explains.
Examples of indirect costs
Indirect costs show up across every area of a small business. Here's a closer look at the categories you're most likely to come across.
Facility and operating expenses
These are the costs of having a place to do business. They're usually the largest share of your overhead.
- Rent for your office, shop or warehouse
- Utility bills for electricity, water, gas and internet
- Land and building tax and building maintenance
- Cleaning and security services
- Depreciation of shared equipment, such as office computers and printers
Administrative costs
Administrative costs cover the people and systems that keep your business organised. They support every team, whatever you sell.
- Salaries for office managers, receptionists and human resources (HR) staff
- Accounting and bookkeeping fees
- Legal and professional services
- Office supplies like paper, printer ink and postage
- Staff training that builds skills across the business
Technology and software
Most businesses rely on technology that supports operations across the board. These costs tend to recur monthly or yearly.
- Cloud accounting software subscriptions
- Customer relationship management (CRM) tools
- Cybersecurity and data backup services
- IT support and hardware maintenance
Insurance and compliance
Protecting your business and your people comes with ongoing costs. Some of these, like employer social security, are mandatory in Indonesia.
- General liability and professional indemnity insurance
- Property insurance for your premises and stock
- BPJS Ketenagakerjaan contributions for support staff, such as work accident (JKK) and death (JKM) cover
- Business licence and permit fees
Marketing and sales overhead
Marketing that promotes your brand as a whole, rather than a single product, is usually an indirect cost. It builds demand for everything you sell.
- Website hosting and maintenance
- General advertising and social media management
- Trade show attendance and sponsorships
- Branded materials such as business cards and brochures
How to calculate indirect costs
Calculating your indirect costs shows you what it really costs to run your business. The most common approach is to find your indirect cost rate, which tells you how much overhead each unit of work carries.
The indirect cost rate formula
The formula is simple: indirect cost rate = total indirect costs ÷ allocation base. The allocation base is the measure you use to spread indirect costs, such as direct labour hours, machine hours or revenue.
4 steps to find your indirect cost rate
You can work out your rate with your existing records. Follow these steps.
- Add up all your indirect costs for a set period, such as a month or a year.
- Choose an allocation base that reflects what drives your overhead.
- Divide your total indirect costs by the allocation base to get your rate.
- Multiply the rate by each project's share of the base to assign its overhead.
A worked example
Say your business has Rp300,000,000 in total indirect costs for the year, and your team logs 4,000 direct labour hours. Rp300,000,000 ÷ 4,000 hours = Rp75,000 per direct labour hour.
Every hour of direct work carries Rp75,000 in overhead. A project that takes 20 direct labour hours would be allocated Rp1,500,000 in indirect costs (20 hours × Rp75,000).
Choosing the right allocation base
The best allocation base depends on what drives your costs. Common options, and when each works well, include:
- direct labour hours, for service businesses where staff time drives most of the work
- machine hours, for manufacturing or production-heavy businesses
- floor space, for spreading facility costs across departments
- total revenue, for businesses with a wide mix of product lines
How to allocate indirect costs
Once you've calculated your indirect costs, you need a method for spreading them across your products, services or projects. The right method shows you the true cost of each thing you sell.
Equal allocation
Equal allocation is the simplest approach: you divide your total indirect costs evenly among all products or departments. It works best when each one uses roughly the same share of overhead.
For example, if you have Rp60,000,000 in monthly indirect costs and three departments, each department is allocated Rp20,000,000.
Proportional allocation
With proportional allocation, you spread indirect costs based on each product or department's share of a chosen measure. That measure could be revenue, direct labour hours or units produced.
Say Department A earns 60% of your revenue and Department B earns 40%. You'd allocate 60% of indirect costs to Department A and 40% to Department B.
Activity-based costing
Activity-based costing (ABC) is the most detailed method. It identifies the activities that drive indirect costs and assigns those costs based on how much each product or service uses each activity.
For instance, if customer support is a large indirect cost, ABC tracks how many support calls each product generates and allocates costs to match. It takes more effort to set up, and it gives you the most accurate picture of your true costs.
Why indirect costs matter for your business
Your indirect costs shape your pricing, profit, tax and ability to grow. Here's how each area benefits when you track them well.
Pricing your products and services accurately
Prices based only on direct costs can leave your overhead uncovered. Build both direct and indirect costs into your prices to protect your profit margins. Your indirect cost rate lets you add overhead to every quote.
Planning your tax
How indirect costs affect your tax depends on which scheme your business uses. Under the general corporate income tax (PPh Badan) regime, expenses you incur to obtain, collect and maintain income are generally deductible. You'll need supporting documents, as PwC Worldwide Tax Summaries notes.
If you pay the 0.5% final micro, small and medium enterprise (MSME) tax on gross turnover, these costs don't reduce your tax. Since 22 April 2026, Government Regulation (PP) 20/2026 has limited the scheme to individuals, single-founder PT Perorangan and cooperatives with turnover up to Rp4.8 billion.
The Directorate General of Taxes explains the new eligibility rules. A tax adviser can confirm which scheme applies to your business.
Making better financial decisions
When you know where your overhead goes, you can spot areas to cut costs or invest with more purpose. For example, if your technology costs are rising faster than your revenue, it's time to review your subscriptions and tools.
Budgeting and securing funding
Your fixed indirect costs set the baseline you need to cover every month, so they're a natural starting point for your budget. Knowing that figure also helps you decide how much cash to keep in reserve.
Lenders and investors look for owners who understand their full cost structure. A clear breakdown of direct and indirect costs in your financial statements builds credibility and strengthens your case.
Tips for managing indirect costs
Keeping indirect costs in check protects your bottom line while you keep quality high. These practical habits help you manage your overhead.
Start by recording every indirect expense consistently. Use accounting software to categorise and monitor your overhead in real time, so your numbers are ready whenever you need them.
Review your indirect costs once a month. Look for expenses that have crept up without a clear reason, subscriptions nobody uses and services where you could negotiate a better rate.
These strategies help keep your overhead lean.
- Renegotiate supplier contracts each year to secure better pricing
- Combine overlapping software tools to reduce subscription costs
- Move to cloud services to lower hardware and maintenance costs
- Automate repetitive admin tasks to free up staff time
- Review insurance policies each year to match cover to your current needs
Set a target for your indirect cost rate and track it over time. If the rate starts rising, look into the cause early so you can adjust before it eats into your profit.
Manage your business costs with Xero
When you understand your indirect costs, you can price with confidence and plan for growth. Tracking them is simpler when all your finances sit in one place.
With Xero, you can categorise expenses automatically through bank feeds and run financial reports that show exactly where your money goes. You'll also see your cash flow in real time, so pricing and budgeting decisions come easier.
Choose a plan and get one month free to start keeping your overhead under control.
FAQs on indirect costs
Here are answers to common questions about indirect costs.
What are 5 examples of indirect costs?
Office rent, electricity bills, BPJS Ketenagakerjaan contributions for admin staff, accounting fees and cloud software subscriptions are five common examples. Each one supports your whole business, whatever you sell.
Are salaries a direct or indirect cost?
It depends on the role: a production worker's wages are direct, while a bookkeeper's salary is indirect. If someone splits their time between both kinds of work, you can divide their salary using timesheets.
What is the difference between overhead and indirect costs?
Overhead usually describes ongoing indirect costs like rent and utilities, so most overhead is indirect. Indirect costs can also include one-off expenses, such as a legal fee for a new lease.
Is depreciation an indirect cost?
Depreciation is an indirect cost when the asset supports the whole business, such as a shared laptop or delivery van. It's a direct cost when a machine is used for only one product line or project.
Can indirect costs be tax-deductible in Indonesia?
Yes, under the general PPh Badan regime, indirect costs that help you earn income are generally deductible if you keep invoices and receipts as proof. They don't reduce your tax if you pay the 0.5% final tax on turnover.
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.