Which option correctly represents the Indirect Cost Formula?

Which option correctly represents the Indirect Cost Formula?

• A. Indirect Costs times Direct Costs
• B. Direct Costs plus Indirect Costs
• C. Indirect Costs divided by Multiplier
• D. Direct Costs x Indirect Multiplier = Indirect costs

Answer: (D)

Indirect costs are determined by applying an overhead rate to the direct costs. The correct formula expresses this as Indirect Costs = Direct Costs × Indirect Multiplier. This shows that the overhead portion is found by multiplying the direct cost base by the indirect rate, giving the amount that should be allocated to indirect expenses. For example, if direct costs are 1,000 and the indirect multiplier is 0.25, the indirect costs amount to 250. The other forms aren’t correct because they either add the costs (giving total costs, not the indirect portion), divide (which would yield direct costs), or multiply opposite quantities in a way that doesn’t reflect how overhead is calculated.

Indirect costs are determined by applying an overhead rate to the direct costs. The correct formula expresses this as Indirect Costs = Direct Costs × Indirect Multiplier. This shows that the overhead portion is found by multiplying the direct cost base by the indirect rate, giving the amount that should be allocated to indirect expenses. For example, if direct costs are 1,000 and the indirect multiplier is 0.25, the indirect costs amount to 250. The other forms aren’t correct because they either add the costs (giving total costs, not the indirect portion), divide (which would yield direct costs), or multiply opposite quantities in a way that doesn’t reflect how overhead is calculated.