4.5 Applicable indirect costs

Indirect costs are other costs incurred that are not directly related to the provision of services. They include:

• operating costs:

corporate overheads:

- ancillary running costs (e.g. power, cleaning, stationery);

- non-core IT and equipment (e.g. used for administration);

administrative overheads:

- employees not directly involved in the service provision;

- facilities management;

- overall project management;

• capital costs:

partial commitment of plant and equipment; and

partial usage of new administration buildings.

Indirect costs can be allocated using two broad methods:

1 traditional indirect cost allocation method

This involves considering the extent to which the indirect cost contributes to, or was caused by, the services. Whatever is identified as driving the cost is then used as the basis for allocating indirect costs to the services. For example, a cost driver for allocating accommodation rental costs would be the ratio of floor space (in square metres) occupied by each person, or work group to the total floor space.

2 activity-based costing method

Under this method, the activities that comprise the production process culminate in the delivery of services. Activity-based costing examines the activities undertaken within an organisation, determines why they are used in the production process, and then assigns costs to services according to the consumption of each activity in the production of the services. Each activity is costed on the basis of the resources consumed.