Indirect costs
In one sentenceCosts that serve more than one product or project and cannot be traced directly to any one of them, so they are allocated on a suitable basis such as direct cost or labor hours.
Simply put
Head office rent and accountants' salaries serve all projects together. You don't know exactly how much belongs to each project, so you choose a reasonable allocation basis.
The choice of allocation basis changes each project's profitability in the reports, so choose a basis that is genuinely related to what causes the cost.
Worked example
A contracting business has general management costs of 60,000 SAR, which it allocates to three projects with direct costs of 300,000, 200,000 and 100,000 SAR.
Total direct costs300,000 + 200,000 + 100,000 = 600,000
Allocation rate = 60,000 ÷ 600,00010% of direct cost
First project's share = 300,000 × 10%30,000 SAR
Indirect costs charged to the first project30,000 SAR
Don't confuse it with
Direct costsDirect costs are charged to the project in full without allocation.
in FullScreen ERP
Cost centers in the general accounts show the profitability of each branch, project or department. General accounts