Free Indirect Costs Essay Sample
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This research seeks to analyze Indirect Costs. What are Indirect Costs? How are they different from Direct Costs? Why are they important in an organization? These are some of the questions that this paper seeks to answer. The study is vey important because Indirect Costs are very useful to an organization. There have been various research carried out by individual researchers as well as other institutions on this topic. The scholars have more or less agreed about my topic, and my paper argues for a better interpretation. For a better understanding, Indirect Costs, also known as overhead, refer to those costs that are not accountable, in a direct way, to a cost object.
The methodology used in this study is that of a comparative case study. It utilizes the benefits of using comparative case studies in the topic of discussion. This is because information dealing with the research topic is in abundance. By looking on previous researches and studies, this research analyses the advantages as well as disadvantages of indirect costs.
This research has found out that, indirect costs may either be variable or fixed. Moreover, indirect costs could include administration, taxes, security costs as well as personnel. On one hand, direct costs are the costs that are directed to services, which benefit specific projects, for example, salaries meant for project staff as well as materials that are required for a particular project. More often than not, the costs for these services are charged to projects on an item by item basis because they can be easily traced to projects.
On the other hand, indirect costs refer to those costs that are directed for services or activities that are of benefit to more than one project. Their benefits to a specific project are usually difficult to trace. However, it is important to note that indirect costs do not vary significantly within some production volumes or some other activity indicators. For this case, they are termed as fixed costs.
The study has also established that it is easy to know a cost as either direct or indirect. For example, labor costs, can be indirect or direct, depending on the application. Moreover, materials like miscellaneous supplies, which are usually purchased in bulk (pens, pencils, paper) are handled as indirect costs. On the other hand, materials which are required for specific projects are handled as direct costs. There are examples of costs that are usually termed as direct, they include, travel, publications, training, project staff or consultants. Those charged directly or indirectly could include postage and printing, telephone charges, miscellaneous office supplies or computer use. However, costs that are usually allocated as indirectly include rent, utilities, equipment rental, administrative staff as well as audit and legal.
Indirect costs are not classified as direct. They represent the expenses which are not identified readily with a particular contract, grant, activity, or project function. However, they are important for the whole operation of the company or organization as well as the conduct of activities that are performed. There are costs like light, accounting, heat, light and personnel, which might be charged directly incase small meters could record minutes in a manner that is cross-cutting. However, there are practical difficulties which preclude such an approach. It is therefore important that indirect cost rates be used to distribute those costs so as to benefit revenue sources. On the other hand, direct costs are identified exclusively with particular cost objectives like a contract, grant, function, project, or activity.
This research has also established that, Indirect Costs are also business expenses which are not in any direct way related to a particular product within the general operation. These costs usually impact the overall manner of the way business is operated. This makes it impossible for costs to be charged to a specific department. The factor which distinguishes direct from indirect costs of any sponsored agreement includes identification with the work which is sponsored. It is not the nature of the goods or services that re involved.
An indirect cost rate is used to refer to the mechanism that can be used to determine what proportions of organizational administration costs should be in each (David, 2003). This should be done fairly and conveniently within administrative principles which are sound. An indirect cost rate is that which represents the ratio between benefiting direct costs and the total indirect costs. This is after excluding and unallowable costs, and expenditures which are distorted.
The study has also established that there are various reasons as to why indirect costs could be allocated to programs. How much a program costs is supposed to include the overall costs of an organization. It is important to know the full cost of a program because it sets a basis for an analysis of the program (financially), pricing services that are free based, as well as asking for compensation from funders for the complete costs of providing the services. Moreover, there are various methods of identifying or allocating indirect costs. Case by case allocation and building up an indirect cost rate are the two methods that are commonly used.
Firstly, in case by case allocation, the rate of actual usage for each program is determined. For example, long distant telephone calls could be tracked and charged to the program when paying for phone bills each month. In a similar case, other organizations could use a counter which tracks copying expenditure in each program. Moreover, time sheets could be used as a basis of allocating salaries to staff whose work receive more than a program. This method is advantageous because it seems applicable. However, it is disadvantageous because it usually requires a lot of record keeping which consumes a lot of time. Not all expenses are going to be covered even when you keep the needed records so as to allocate expenses that are shared among programs. An indirect course is very useful for the shared expenses that are not easily divisible directly into programs or functions.
Secondly, in developing an indirect cost rate, the first thing to do is separation of all the costs in two groups; that is into direct and indirect costs (Ursula, 2006). Indirect costs are collected together and allocated to programs depending on rate or a set proportion. However, it is important to note that there exist various measures that can be used to determine the proportion of an indirect cost that can be applied to each of the program. Moreover, indirect cost rates for an organization may differ in other federal agencies. Organizations may decide to allocate indirect costs depending on many logical methods, for example, the number of people being served in each of their programs or how large their sites are.
It is important to note that a cost may be defined as direct or indirect depending in the cost object David, D. (2003). An indirect cost is defined as a cost that is not convenient and easy to trace to the cost object which is under consideration. If the cost objective is supposed to cost the running of the whole business, it is then that all costs are direct.