Incurred Cost

Incurred Cost Meaning

Incurred cost in accrual accounting refers to the expense of the company when an asset is consumed, and the company becomes liable for and may include direct, indirect, production, operating expenses that are incurred for running the business operations of the company. It also includes all the prior period expenses, i.e., cost incurred before the company comes into existence. Incurred Costs are an expense for the company and are recorded in the debit side of the profit & loss account.

Top 10 Types of Incurred Cost

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  1. Manufacturing Cost: It refers to the cost incurred to convert the raw materials into finished goods. They are used in direct materialsDirect MaterialsDirect materials are raw materials that are directly used in the manufacturing process of a company's goods and/or services and are an essential component of the finished goods manufactured.read more, direct labor, and direct expenses, which form part of the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more and are debited to the trading account in the financial statement.
  2. No-Manufacturing Cost: It refers to all the costs incurred, which are not manufacturing in nature i.e, it included operating, admin, and selling expensesSelling ExpensesThe amount of money spent by the sales department on selling a product is referred to as selling expenses. This includes expenses incurred on advertising, distribution and marketing. Because it is indirectly related to the production and delivery of goods and services, it is classified as an indirect cost.read more.
  3. Fixed Cost: Fixed cost refers to the fixed expenses the company pays to run the business. It includes rent, salaries, and other expensesExpensesOther expenses comprise all the non-operating costs incurred for the supporting business operations. Such payments like rent, insurance and taxes have no direct connection with the mainstream business activities.read more that are payable monthly.
  4. Variable Cost: Variable Cost refers to the cost incurred for the product to be sold in the open market.
  5. Capital cost: It refers to the cost incurred for buying a capital asset.
  6. Direct Cost: Direct Cost refers to the cost incurred to convert raw materials into finished goods and is directly related to the finished product of the company.
  7. Product Cost: Product Cost refers to the cost that is incurred to make the product saleable. The entire costing of the product is done by keeping into account all the necessary expenses incurred to make the finished product saleable in the market.
  8. Labor Cost: It refers to the cost incurred on the employees of the company or the laborers to keep the work going
  9. Sunk Cost: It refers to the historical cost incurred by the company and does not make any difference in the decision making.
  10. Relevant Cost: It refers to the cost incurred, which is relevant in the decision making of the company.

Examples of Cost Incurred

Below are some examples of the cost incurred by the company.

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Advantages

Below are some of the advantages.

Disadvantages

  • A higher cost structure in the early stages of the company may result in a greater amount of liquidity crisis due to excessive costing.
  • Some cost is non-cash in nature and hence does not have an impact on the actual costing.

Conclusion

The cost incurred by the company right from its early stages plays a crucial role in the long term survival of the same. Generally, the companies in their early stages incur more cost as compared to the established companies, since they are new in the market and there is a need to build the necessary infrastructure and invest in the right human capital to excel in the business.

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This article has been a guide to what is “Incurred Cost,” and it’s meaning. Here we discuss the top 10 types of cost incurred by the company along with examples and explanations. You can learn more about financing from the following articles –  

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