{"id":94303,"date":"2026-09-24T07:36:55","date_gmt":"2026-09-24T07:36:55","guid":{"rendered":"https:\/\/mailrelay.com\/?post_type=glossary&p=94303"},"modified":"2026-10-07T15:03:49","modified_gmt":"2026-10-07T15:03:49","slug":"indirect-costs","status":"publish","type":"glossary","link":"https:\/\/mailrelay.com\/en\/glossary\/indirect-costs\/","title":{"rendered":"Indirect Costs: What They Are and How to Calculate Them"},"content":{"rendered":"\n

Indirect costs are the expenses a business needs in order to operate but that can’t be assigned to a specific product or service.<\/strong> Rent on the factory, the accounting team’s salaries or the office electricity bill are common examples.<\/p>\n\n

They are also known as overhead<\/strong>. You may also see them called indirect expenses, general expenses or overheads.<\/p>\n\n

Their opposite is direct costs<\/a>: the ones you can tie to each unit produced, such as raw materials or the wages of the people who make the product.<\/p>\n\n

Difference between direct and indirect costs<\/h2>\n\n

The key question is: can I tell how much of this expense belongs to each product? If the answer is yes, it’s a direct cost. If not, it’s indirect.<\/p>\n\n

<\/th>Direct costs<\/th>Indirect costs<\/th><\/tr><\/thead>
What they are<\/td>Expenses tied to each product or service<\/td>Expenses the business needs as a whole<\/td><\/tr>
How they are assigned<\/td>Directly, per unit<\/td>Using an allocation criterion<\/td><\/tr>
Examples<\/td>Raw materials, packaging, production labor<\/td>Rent, administration, electricity, insurance<\/td><\/tr>
If you stop making a product<\/td>They disappear<\/td>They usually remain<\/td><\/tr><\/tbody><\/table><\/figure>\n\n
\"Infographic<\/figure>\n\n

Types of indirect costs<\/h2>\n\n

They are usually grouped by the area of the business that generates them: production or the rest of the company.<\/p>\n\n

Manufacturing indirect costs<\/h3>\n\n

These are the expenses of the factory or production area that can’t be assigned to each unit. They are often referred to as manufacturing overhead<\/strong>. They fall into three groups:<\/p>\n\n

Indirect materials.<\/strong> Used in production, but in quantities that are hard to measure per unit: lubricants, glue, screws and bolts, or cleaning products.<\/p>\n\n

Indirect labor.<\/strong> Staff who support production without making the product: supervisors, quality control, maintenance or warehouse staff.<\/p>\n\n

Other manufacturing expenses.<\/strong> Factory rent, plant electricity, machinery depreciation, repairs or insurance for the facilities.<\/p>\n\n

General indirect costs<\/h3>\n\n

These are the expenses of the areas that don’t produce anything but that the business needs to operate:<\/p>\n\n

Administrative.<\/strong> Salaries for management, accounting and human resources, outside advisors, management software and office supplies.<\/p>\n\n

Sales and marketing.<\/strong> Advertising, marketing tools, sales team salaries or trade shows. Brand advertising is an indirect cost because it can’t be assigned to each unit sold.<\/p>\n\n

Are they fixed or variable?<\/h3>\n\n

They can be either. Rent or insurance are fixed<\/strong>: they cost the same whether you produce a lot or a little. Factory electricity or machine maintenance are variable<\/strong>, because they rise with production.<\/p>\n\n

10 examples of indirect costs<\/h2>\n\n
Example<\/th>Type<\/th>Fixed or variable<\/th><\/tr><\/thead>
Factory or premises rent<\/td>Manufacturing<\/td>Fixed<\/td><\/tr>
Production supervisor’s salary<\/td>Manufacturing<\/td>Fixed<\/td><\/tr>
Factory electricity and water<\/td>Manufacturing<\/td>Variable<\/td><\/tr>
Machine maintenance and repairs<\/td>Manufacturing<\/td>Variable<\/td><\/tr>
Machinery depreciation<\/td>Manufacturing<\/td>Fixed<\/td><\/tr>
Indirect materials: lubricants, cleaning products<\/td>Manufacturing<\/td>Variable<\/td><\/tr>
Administrative and human resources salaries<\/td>General<\/td>Fixed<\/td><\/tr>
Management software and licenses<\/td>General<\/td>Fixed<\/td><\/tr>
Business insurance<\/td>General<\/td>Fixed<\/td><\/tr>
Advertising and marketing tools<\/td>General<\/td>Depends on the campaign<\/td><\/tr><\/tbody><\/table><\/figure>\n\n

How to calculate and allocate indirect costs<\/h2>\n\n

Since they don’t belong to a specific product, you have to allocate them using a criterion called the allocation base<\/strong>.<\/p>\n\n

The most common bases are machine hours, labor hours or units produced.<\/p>\n\n

The calculation has three steps:<\/p>\n\n

1. Add up the indirect costs for the period.<\/strong> For example, \u20ac30,000 a month in manufacturing indirect costs.<\/p>\n\n

2. Calculate the allocation rate.<\/strong> Divide that total by the base you’ve chosen. If the factory runs 1,500 machine hours a month: \u20ac30,000 \/ 1,500 h = \u20ac20 per machine hour<\/strong>.<\/p>\n\n

3. Assign them to each product.<\/strong> If a product needs 3 machine hours, it is allocated \u20ac60 of indirect costs.<\/p>\n\n

With that, you know its total cost. If that product has \u20ac40 of materials and \u20ac25 of direct labor, its cost is 40 + 25 + 60 = \u20ac125<\/strong>. At any price<\/a> below that, you lose money on every unit.<\/p>\n\n

Companies with many different products often use activity-based costing<\/strong> (ABC). Instead of a single base, they allocate each expense according to the activity that generates it: orders, machine setup, shipping.<\/p>\n\n

\"Example<\/figure>\n\n

Why it’s important to keep them under control<\/h2>\n\n

To set prices.<\/strong> If you only count direct costs, you may sell below what each product actually costs you.<\/p>\n\n

To know how profitable you are.<\/strong> These expenses tend to grow little by little without anyone reviewing them. Keeping them in check protects your margin.<\/p>\n\n

To make decisions.<\/strong> Knowing what it costs to maintain your structure helps you decide whether to outsource, move premises or launch a new product.<\/p>\n\n

How to reduce indirect costs<\/h2>\n\n

Review your contracts every year.<\/strong> Rent, insurance, cleaning, phone and software: renegotiating or switching providers usually brings quick savings.<\/p>\n\n

Save energy.<\/strong> LED lighting, motion sensors and energy-efficient equipment.<\/p>\n\n

Do preventive maintenance.<\/strong> A breakdown that halts production costs far more than a regular inspection.<\/p>\n\n

Digitize processes.<\/strong> Invoicing, document signing and internal communication in the cloud save paper, space and hours of administrative work.<\/p>\n\n

Outsource whatever isn’t your core business.<\/strong> Accounting advice, payroll or IT maintenance can be cheaper when done externally.<\/p>\n\n

Choose marketing channels you own.<\/strong> Ads are paid for every click or impression. A subscriber list is yours, and writing to it costs very little.<\/p>\n\n

You’ll find more ideas for cutting expenses in our article on how to keep a business afloat in times of crisis<\/a>.<\/p>\n\n

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Indirect costs and marketing<\/h2>\n\n

Marketing is one of the indirect costs that varies most from one company to another. That’s why it’s worth measuring it with metrics such as customer acquisition cost (CAC)<\/a> or the ROI<\/a> of each channel, and giving it a clear budget<\/a>.<\/p>\n\n

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Frequently Asked Questions<\/h2>\n\n

These are the most common questions about this type of expense.<\/p>\n\n

What are indirect costs?<\/h3>\n\n

The expenses a business needs in order to operate that can’t be assigned to a specific product or service, such as rent, administration or utilities.<\/p>\n\n

What is the difference between direct and indirect costs?<\/h3>\n\n

Direct costs can be assigned to each unit produced, such as raw materials. Indirect costs are shared across the whole business and have to be allocated using a criterion.<\/p>\n\n

Are indirect costs fixed or variable?<\/h3>\n\n

They can be either. Rent is a fixed indirect cost; factory electricity is a variable one.<\/p>\n\n

What are manufacturing indirect costs?<\/h3>\n\n

Production expenses that can’t be assigned to each unit: indirect materials, indirect labor and other factory expenses, such as machinery depreciation.<\/p>\n\n

Is advertising a direct or indirect cost?<\/h3>\n\n

Usually indirect: it benefits all of the brand’s products and can’t be assigned to each unit sold.<\/p>\n\n

Related terms<\/h2>\n\n