Which type of costs includes overhead and profits?

The type of costs that includes overhead and profits is classified as indirect costs. Indirect costs are not directly attributable to a specific project or activity; instead, they are necessary for the overall operation of an organization. This category encompasses expenses such as administrative salaries, utilities, depreciation, and any other costs that support the organization but do not directly tie to the production of goods or services.

Overhead costs, which fall under indirect costs, are particularly important in understanding the total cost structure of a business, as they provide insight into the expenses that must be covered to keep the business running. Profits can also be considered a part of the indirect cost spectrum because they reflect the return expected from the total investment and resources employed by the organization.

In contrast, direct costs are specifically linked to the production of goods or services and can be traced directly to individual cost objects, such as materials and labor. Variable costs change with the level of output while fixed costs remain constant regardless of output levels. Understanding these distinctions is critical for financial analysis and budgeting within an organization.