Business Development Bank of Canada Clarifies Indirect Costs for Businesses

The Business Development Bank of Canada (BDC) has issued a clarification on indirect costs, defining them as expenses incurred by a business that cannot be directly tied to the production of a good or the provision of a service.

These costs are commonly referred to as overhead. BDC states that understanding indirect costs is crucial for business owners, as it helps in identifying inefficiencies, improving pricing strategies, and increasing profitability.

Examples of indirect costs include office rent, administrative staff salaries, and marketing expenses. BDC emphasizes the importance of tracking these costs, as their increase may necessitate adjustments in product pricing or improvements in operational efficiency.

The bank distinguishes indirect costs from direct costs, which are directly attributable to product manufacturing or service delivery. Indirect costs can be further categorized into fixed costs, such as rent, and variable costs, like employee mobile data usage.

Businesses can reflect indirect costs on their income statements. For a manufacturing company, for instance, selling, general, and administrative expenses are presented as indirect costs, separate from production costs.