What are indirect costs?

Indirect costs (definition)

Indirect costs are general business and administration expenses that aren’t directly linked to making products or delivering services. They’re the opposite of direct costs.

An indirect cost is money a business spends even when it’s not selling goods or delivering services.

Examples of indirect costs

  • Wages for back-office and sales employees
  • Office rent and supplies
  • Insurance
  • Utilities (mostly)
  • Sales and marketing activities
  • Merchant service fees for processing customer card payments

Why indirect costs matter

While it’s relatively simple to pick apart all the direct costs that go into delivering products or services, indirect costs can sometimes be hidden. It’s important to identify them, understand them, and have a plan for funding them. You will need a sales and pricing strategy that can pay for everything.

How they differ from direct costs

A cost is either indirect or direct. It can’t be both.

Direct costs represent the money that goes into creating and delivering products or services to customers. Indirect costs are all the other background expenses involved with running the business.

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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.