How to Calculate the Indirect Cost Rate

Multi-program organizations, such as colleges and youth sports leagues, often use the same source of funds to cover expenses for its many divisions. These expenses are typically separated into two categories: direct cost and indirect cost. Direct cost is that which is easily attributed to a specific program, such as the salary of a professor for a certain department. Indirect costs are those which are more difficult to attribute to just one program or which effect all programs, such as the salary of a university administrator. Establishing a cost rate is one way of allocating money for indirect cost.

Step 1

Categorize all costs as either direct or indirect. To accomplish this, separate every cost which can be directly attributed to one program from those which are shared among them all.

Step 2

Assign each direct cost to the program where the expenditure shall be made. Items or personnel which are shared among programs can be considered indirect cost.

Step 3

Add up the total direct costs of the programs and the total indirect cost of all programs. For example: assume that there are three programs under one organization with $5000 in direct cost and another $500 in indirect cost, giving a total budget of $5500. The direct costs are $2500 for Program A, $1500 for Program B and $1000 for Program C.

Step 4

Calculate the percentage of each program's direct cost from the total direct cost in the budget. For example: Using the same numbers as an example, Program A uses 50 percent of the total direct cost while Program B uses 30 percent and Program C uses 20 percent.

Step 5

Allocate indirect cost funds from the total indirect cost budget equal to percentage of each direct cost from the total direct cost budget. This way the rate of indirect cost allocation aligns with that of direct cost allocation. For example: From the $500 indirect cost budget, Program A receives $250, or 50 percent, Program B receives $150, or 30 percent and Program C receives $100, or 20 percent.