Although any new or amended rule would itself be subject to judicial review under the APA, NIH and HHS now have a checklist of considerations that they could seek to address to support a new regulatory approach to indirect rates. One controversy revolves around a specific metric called the indirect-costs rate, and an executive order standardizing and reducing this rate for all current and future NIH-funded research grants. If you can relate, join me on a brief foray into the fascinating world of finance, where I hope to dispel some potential myths and misunderstandings and help us all get a better grasp on this pressing issue.

These expenses cannot be outrightly and completely allocated to the specific cost centre or cost unit. However, these can be apportioned to and absorbed by the cost centres, or cost unit. A company must pay salaries to its employees regardless of the production or sale of products or services. These costs can come in form of salaries, rents, wages, transportation costs, loans, overdrafts, utility bills, etc. To monitor these expenses properly, we can segregate them into direct expenses and indirect expenses. For-profit businesses also generally treat “fringe benefits,” including paid time off and the use of a company car, as indirect costs.

Direct vs. Indirect Expenses: What’s the Difference?

The chancellor of the University of California, San Diego, also directed his readers to UCSD’s safety and wellness services in his February 26 e-mail regarding the NIH’s indirect cost recovery cap. Variable costs are expenses that change based on how many items you produce or how many services you offer. For example, you would spend more money producing 200 toys as opposed to 100 toys. The above expenses are considered indirect if they cannot be applied toward a single product or service.

Direct cost examples for small businesses

Big Law has gotten involved in the fight against the NIH, as it does in almost all left-wing causes. But an advisory from Arnold & Porter squeezes into its doomsaying a few practical suggestions for coping with a reimbursement cap, such as resource sharing among institutions, bridge funding from foundations, and industry partnerships. It suggests recouping indirect costs through other means, presumably by recategorizing them as direct costs. That’s a change that both parties would benefit from, since direct costs can be monitored for misuse.

It does seem to concede, however, that the retroactive nature of the cap is its most vulnerable aspect. Indirect expenses are those that are not directly attributable to the goods and services rendered. Such expenses are vital indirect expenses to the running of the business and tend to remain steady regardless of activity levels. Such expenses are incurred to offer support for a range of business activities but are not limited to a single entity.

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• Those first wartime defense contracts included a flat indirect cost rate of 50 percent added to the contract—a seeming bargain compared with the 100 percent markup for indirect costs that private companies were getting.
• Let’s take a simplified look at the differences between the two and how to determine which category your expenses fall under.
• More than 1,000 employees have been terminated recently, part of a larger government purge that’s hit other federal health agencies such as the CDC and FDA, NPR reported.
• A reasonable indirect cost rate can vary depending on a variety of factors, such as the type of construction project, the location, and the size of the construction company.
• A federal judge will continue to temporarily block the National Institutes of Health’s plan to slash its payment of research expenses incurred by universities on the grants they’ve received from the agency.

These overhead costs are the ones left over after direct costs have been computed. To understand and study indirect expenses, it is important to study the company’s Income Statement. Therefore, it is the primary source of information for anything unrelated to the core revenue generation activities.

Hours after NIH director confirmed, the agency tackles one of his priorities — ending ‘censorship’ in science

• The 15 percent indirect cost-rate cap applied to grants already under way, not just to future grants.
• Direct expenses are chargeable expenses and so they are debited to Direct Expenses Account.
• To understand and study direct expenses, it is important to study the company’s Trading Account.
• They argue that the cuts violate congressional restrictions and could have devastating effects on research operations.
• Unlike direct, indirect expenses are not directly related and assigned to the core business operations of a firm.

They also affect the final cost of a product or service that the company provides. Often, funding for a specific project will largely support direct costs. Certain government agencies might allow you to explain why indirect costs should be funded, too, but the decision to grant funding is at their discretion. A federal district court in Massachusetts issued a TRO on February 10, preventing NIH from implementing the cap in the 22 states represented in the lawsuit pending a hearing on February 21. Following the initial TRO, the judge extended the temporary pause nationwide. According to Inside Higher Ed, the agency awarded about $26 billion to more than 500 grants to universities in FY 2024.

“Their approach seems to be We go in; we bully; we say, ‘Do this; you have no choice,’” and shows little regard for the people or research affected, one former official told me. The plaintiffs in all three cases offered similar legal arguments against the cap. Section 75.414(c) recognizes that, once a cognizant awarding agency negotiates rates with a recipient, those rates should be honored by other awarding agencies. This is because the negotiated rate has already been found to reflect a reasonable causal/beneficial relationship between the costs in the indirect expense pool, on the one hand, and the costs in the allocation base for that pool, on the other.

Similarly, indirect fixed cost is not traceable or directly related to each unit of product and neither does it vary as per the output, for e.g. guard salary. For example, a hospital can’t trace the utility bill back to a specific service or cost object because it will be used by all the hospital departments, hence it will be charged as a whole rather than charged to a specific department. Indirect Expenses which are related to the factory are allocated to the units of output produced in the factory in the period in which expenses were incurred. Depending on your industry, you may have assets and expenses directly related to producing goods or services.

Indirect costs

Organizations can also reduce their expenses by evaluating the importance of the costs of operating the business and appropriately choosing the best ways to reduce them. Expenses borne by the company can be of two types- direct expenses and indirect expenses. Direct expenses are the costs directly related to the manufacture of goods, such as the cost of raw materials and direct labor expenses. A company incurs these costs in delegating its daily business operations. Indirect expenses can be of two types- fixed indirect costs and recurring indirect expenses. Previously, the NIH was adding up to 69 percent of a research grant to cover the facilities & administration infrastructure that allegedly undergirded subsidized research.

Examples of Indirect Expenses

And, one employee’s salary might be an indirect cost while another’s is a direct cost. For example, an employee on an assembly line receives wages that are considered direct costs. But an employee who works as a secretary in the same company would receive wages that are considered indirect expenses. To turn a profit in your business, you need to make sure your products or services bring in more money than what you put into them.

Examples of direct expenses include manufacturing materials, direct materials, and direct labor. These expenses are shared across multiple projects or activities and are not directly traceable to a specific cost object or activity. For example, a smaller construction company may have a higher indirect cost rate due to lower economies of scale, while a larger company may have a lower indirect cost rate due to greater efficiencies and cost-sharing opportunities. If the expense is directly linked to a specific good or service, it should be classified as a direct expense.

In response to the policy change, a coalition of 22 state attorneys general and several universities filed lawsuits challenging the legality of the NIH's new policy. They argue that the cuts violate congressional restrictions and could have devastating effects on research operations. They can forgo indirect cost funding from foundations only because the government already provides it, they say. In other words, taxpayers are easy marks when their money is being stewarded by federal bureaucrats.

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Unlike indirect costs, you do not divide direct costs among different departments or projects. You must know your business’s direct and indirect costs when pricing products and updating your accounting books so your records are accurate. Understanding the difference between direct and indirect costs is essential for accurate tax filing and can help you find tax deductions. The IRS requires businesses to separate the costs of goods sold from operating expenses and to enter the amounts on different lines and sections.