Direct and Indirect Cost

What Are Indirect Costs?

In a multi-program organization, all costs can be divided into two different types: direct and indirect. Direct costs are those which are clearly and easily attributable to a specific program. For example, the cost of new basketballs is clearly related to the after-school athletics program. Similarly, it is easy to justify charging counselors salaries to the counseling program.

Indirect costs are those which are not easily identifiable with a specific program, but which are, nonetheless, necessary to the operation of the program. These costs are shared among programs and, in some cases, among functions (program, management and general, and fundraising). The executive director's salary is a common example of an expense which benefits all programs and functions. Other indirect, or shared, costs may include rent, telephone, postage, printing and other expenses which benefit all programs and functions of an organization.

Why Allocate Indirect Costs to the Programs?

The full cost of a program rightfully includes a share of the overall costs of the organization. Knowing the full cost of a program sets a basis for financial analysis of the program, for pricing fee-based services, and for requesting reimbursement from funders for the full costs of providing services.

What Are the Methods for Allocating Indirect Costs?

There are several methods for allocating indirect costs. The two most common are case-by-case allocation and developing an indirect cost rate.

* Case-by-Case Allocation

One method of allocating indirect costs is to determine a rate of actual usage for each program. For example, you may decide to keep track of long distance telephone calls and charge them to the appropriate program when you pay the phone bill each month. Similarly , some organizations use a counter or log to track copying expenses for each program and/or function. Time sheets may form the basis for allocation of salaries for the executive...