Indirect Overhead - Projects
Code: 5135Account Information
| Financial Statement | Income Statement |
| Normal Balance | Debit |
Definition
Indirect costs that serve multiple projects and are allocated based on a reasonable method, such as salaries of engineers supervising multiple projects, site rent, security expenses, and insurance.
📐 IFRS vs US GAAP Accounting Treatment
IFRS: Indirect overhead is recognized as part of project cost when allocated using a reasonable and consistent allocation basis.
IFRS: Measured at actual amount incurred, allocated to projects using a basis such as (direct costs, labor hours, or machine hours). GAAP: Same measurement.
IFRS: Disclose nature of indirect overhead and allocation basis used. GAAP: Additional disclosures on overhead costs.
Example: General site rent SAR 100,000 allocated equally to 4 projects = SAR 25,000 per project.
GAAP: Indirect overhead recognized as part of project cost when allocated.
GAAP: Measured at actual amount incurred, allocated on reasonable basis.
GAAP: Additional disclosures on overhead costs.
Example: General site rent SAR 100,000 allocated to 4 projects = SAR 25,000 each.
IFRS: Indirect costs are distributed across projects in a reasonable proportion (e.g., direct costs or labor hours). GAAP: Same principle, with details on the basis of distribution.
❓ Frequently Asked Questions
A: Indirect overheads are costs that serve multiple projects and cannot be directly traced to a specific project unit, such as: salaries of engineers supervising multiple projects, project site rent, security expenses, project insurance, and travel and accommodation expenses for work teams.
A: Indirect overheads are allocated to projects at the end of the accounting period using a reasonable and consistent allocation basis, such as: ratio of direct costs per project to total direct costs, direct labor hours per project, or revenue ratio per project.
A: Indirect overheads directly serve projects and are allocated to project costs (appearing within Construction Cost). General administrative expenses serve the company as a whole and are not allocated to projects (appearing as administrative expenses on the income statement).
A: Indirect overheads for future projects are estimated based on: average indirect overheads from similar past projects, a percentage of expected direct costs, or a detailed analysis of indirect activities required for each project (e.g., required supervision hours).
A: Indirect overheads allocated to projects appear as part of Construction Cost on the income statement. They do not appear as a separate line item but are merged with direct costs (materials, labor, subcontractors, equipment rental) to form total Construction Cost.