Indirect Costs Behaviour

An estimator, at the time of costing, computes all the indirect costs in detail or evaluates by using predetermined company norms.The estimator adds these indirect costs to the direct costs for calculating the final production costs. But this is not adequate for planning, budgeting and controlling costs. In order to analyze the cost behaviour, a planner or the cost accountant further splits up each item of indirect cost into three broad categories, i.e. variable costs, fixed costs and semi-variable costs.

  • Variable costs tend to vary directly with the volume of production, i.e. work done for output. No production means no cost. Cost rises as the volume of production increases. These costs change at a constant rate (assumed) to changes in the volume of production as shown in below:
Examples of indirect variable costs are telephone running expenses, camp messing expenses and office stationery expenses.


  • Fixed costs do not show any appreciable fluctuations with changes in production levels. These costs are either one-time costs like the camp construction cost or periodic costs such as supervisor's salary for a period of six months, or are monthly, recurring expenses like monthly rent for project office and monthly depreciation for project construction equipment.
  • Semi-variable costs are partly fixed and partly variable in nature. Examples of these are telephone expenses which consist of fixed installation expenses, and variable operating expenses which vary with the volume of work or production activities.

It is not always feasible to clearly demarcate indirect costs into variable and fixed categories as many cost behaviour patterns are possible. There are indirect costs which may display rising mixed behaviour patterns. For example, when material prices get discounted with an increase in the order quantity. But for apportioning indirect costs, it is necessary to divide each item of indirect cost broadly into production-related variable indirect costs and periodic or time-related fixed indirect costs.