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An indirect cost rate is calculated by simply dividing your pool of total indirect costs for your fiscal year by some cost base. For example, if you have a pool of indirect costs of $150,000 and a direct base of $1,000,000, your indirect cost rate for that fiscal year would be 15 percent ($150,000/$1,000,000).
By clearly explaining indirect costs formulas, this article will equip you to accurately calculate and allocate overhead expenses. You'll get a breakdown of key terms, formulas, and examples for computing indirect rates to simplify budgeting and compliance.
An indirect cost rate is simply a device for determining fairly and conveniently within the boundaries of sound administrative principles, what proportion of indirect cost each program should bear. An indirect cost rate is the ratio between the total indirect expenses and some direct cost base.
Each one can be allocated or calculated using an indirect cost rate formula or method. One basic method is fixed cost classification. Identifying fixed costs, such as rent and labor costs is entailed in this method.
The indirect cost rate formula is calculated by dividing the total indirect cost pool by the total amount of direct costs, and then multiplying that number by each cost object’s direct costs. Let’s look at an example.
Indirect cost is any cost that the firms cannot count for a particular business activity, project, service, or objective. Instead, this expense incurred helps achieve more than one business objective at a time, and hence it cannot be directly linked to any one particular cost object.
Once the negotiated ICR is approved, organizations will calculate the actual indirect costs on a periodic basis. With the Total Direct Labor approach, the approved ICR is multiplied by the actual total of salaries (personnel) and fringe benefits for the period, as shown in exhibit 2. Exhibit 2.
The indirect cost rate is simply an arithmetic calculation of dividing a pool of expenses (numerator) by an allocation base (denominator) such as direct labor cost or total direct costs plus overhead. The allocation base utilized for distributing indirect expenses is the method that allocates costs most equitably to the primary cost objective.
Here is the actual indirect cost rate for the vehicles and equipment (using miles driven for the month as the cost object). The formula is explained in the section “Computing direct costs and indirect costs”: Indirect cost allocation rate = $8,000 ÷ 1,300 miles Indirect cost allocation rate = $6.15 per mile. Predetermined or budgeted means ...
In order to calculate an indirect cost rate, a company must first group all indirect costs into distinct indirect cost pools. FAR’s only requirement is that the allocation of indirect...