How to Incorporate Indirect Costs into Pricing

by Greg DePersio

1 min read

An indirect cost is an expense related to more than one product, project, or department and benefits a few areas within your business. For example, the rent of your office building is an expense not tied to any single product since the building houses all your business operations. You still need to account for building rent in the price of your goods, because the rent expense is a cost to do business. Tools like hammers and screwdrivers are indirect costs in the construction industry because they are used in several projects. If you work in the retail industry and your employees oversee several different products at one time, this is an indirect cost as well.An indirect cost is allocated to the items it relates to. Through allocation, you assign a small part of the overall cost to several different projects, products, etc.To figure out how much should go where, you must first select cost drivers. Cost drivers are measurements that tell you how an item was used. Square footage could be considered a cost driver for the indirect of rent. If 60% of your office’s square footage relates to making Product A, 60% of the indirect cost of rent should be included in the pricing of Product A. By assigning indirect costs, you can have better information to help your make decisions. You should consider monitoring your indirect costs and evaluate how to allocate them to put your company in the best position.

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