Indirect Costs
Definition:
Indirect costs, also known as overhead costs, are expenses that cannot be directly attributed to a specific product or service but are necessary for the overall operation of the business. These costs are typically harder to identify and allocate to individual outputs.
Example:
Acme Manufacturing incurs various indirect costs in its operations, such as the rent and utilities for its factory building, the salaries of administrative staff, and the cost of general office supplies. These costs are not directly related to the production of any specific product but are necessary to support the overall manufacturing process. Indirect costs are often allocated to products or services based on a predetermined formula, such as the number of labor hours or square footage used.
Why are Indirect Costs important to Procurement teams?:
Indirect costs can have a significant impact on an organization's overall profitability and must be carefully managed by procurement teams. By understanding and controlling indirect costs, procurement professionals can help to optimize operational efficiency, reduce waste, and improve overall cost competitiveness. Effective management of indirect costs may involve negotiating better prices for overhead items, implementing cost-saving measures, or finding ways to allocate costs more accurately to individual products or services.