Indirect costs must be:

Indirect costs are expenses that cannot be directly traced to a specific cost object, such as a particular product or project. These costs include things like overhead, utilities, and administrative expenses that support the production process but are not directly involved in manufacturing a product. Because they cannot be attributed directly to a specific product or service, it is crucial to allocate these costs appropriately across all products and services that benefit from them.

Allocating indirect costs ensures that the financial statements provide a more accurate picture of the actual costs associated with producing goods or services. This practice helps in determining the overall profitability of each product line and supports better decision-making regarding pricing, product development, and resource allocation. By adopting an allocation method, businesses can spread indirect costs over multiple cost objects, thus ensuring that all aspects of production are adequately financed and represented within the financial statements.

In contrast, ignoring these costs would lead to a distorted view of profitability and could result in poor strategic decisions. Similarly, calculating indirect costs only during the product costing phase limits their visibility in overall financial reporting, far removed from their ongoing influence on operations. Lastly, directly attributing indirect costs to a single product fails to acknowledge the shared nature of these expenses among multiple products or services.