Plain definition
Indirect costs support more than one product, job, or customer and cannot be traced to one of them economically. They may be allocated for analysis, but allocation is an estimate rather than direct observation.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A factory’s site rent supports three product lines. The finance team assigns rent by floor area for annual product reporting. A manager should not read the resulting charge as proof that one product caused exactly that rent.
Why it matters
The allocation can inform long-run choices, but treating it as an avoidable cost can lead to rejecting a product that still helps cover rent.
Practical consequence
State the cost object and allocation basis, test whether the basis reflects resource use, and show direct cost separately from allocated cost when making decisions.