Commercial Applications
Which definition best describes indirect costs?
- Indirect costs are those costs which are not controlled directly by a manager.
- Indirect costs are those costs which cannot be directly associated with a product or service.
- Indirect costs are always fixed.
- Indirect costs are always manufacturing overhead cost.
Cost
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Answer
Indirect costs are those costs which cannot be directly associated with a product or service.
Reason — The defining feature of indirect costs is lack of traceability — they cannot be easily, directly and wholly identified with a particular cost unit or cost centre. Option 1 describes uncontrollable costs, not indirect costs. Option 3 is incorrect because indirect costs may be fixed or variable. Option 4 is too narrow because indirect costs include not only manufacturing overhead but also office, administrative, selling and distribution overheads.
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