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.
- Every company needs to plan its expenses in the most conservative manner since they are the lifeline of the business and are required to be paid on time.
- A thorough analysis of the cost structure of the company will help the management to take some strategic decision which will impact the growth story of the company.
- For a company to analyze cost structure, it needs to take into account both cash and no-cash expenditure to arrive at the correct costing for the product.
- Since the selling price of the company depends upon the cost incurred in it, many companies try their level best to keep the cost low by not allocating expenses that are not that relevant in making the finished product. Instead, only relevant expenses are considered as “Cost Incurred” for the product to keep the selling price at the lowest.
Top 10 Types of Incurred Cost
- Manufacturing Cost: It refers to the cost incurred to convert the raw materials into finished goods. They are used in direct materials, direct labor, and direct expenses, which form part of the cost of goods sold and are debited to the trading account in the financial statement.
- No-Manufacturing Cost: It refers to all the costs incurred, which are not manufacturing in nature i.e, it included operating, admin, and selling expenses.
- Fixed Cost: Fixed cost refers to the fixed expenses the company pays to run the business. It includes rent, salaries, and other expenses that are payable monthly.
- Variable Cost: Variable Cost refers to the cost incurred for the product to be sold in the open market.
- Capital cost: It refers to the cost incurred for buying a capital asset.
- 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.
- 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.
- Labor Cost: It refers to the cost incurred on the employees of the company or the laborers to keep the work going
- Sunk Cost: It refers to the historical cost incurred by the company and does not make any difference in the decision making.
- 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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- Rentals: It refers to the amount spent by the company at the beginning of the year for reaping the benefits for the full year. Rent per month = Total Rent Paid / 12.
- Telephone: It refers to the telephone expense paid by the company. Even if the bill has not been generated, it is a cost incurred and needs to be booked as an expense in the Profit & Loss Account.
- Supplies: It refers to the purchase of raw materials for the company to make the finished Goods. Even if it is not paid immediately, it is an expense for the Company and needs to be recognized as a liability in the Balance Sheet.
- Depreciation: Depreciation refers to the benefits gained for using the Asset over the period. Even if it is a non-cash Expenditure, it needs to be booked as an expense in the Income Statement.
- Salaries: It refers to the fixed expense paid to the employees of the company or the labor workforce to keep the business operations running.
- Sundry Expenses: These are referred to as miscellaneous expenses incurred by the company on a day to day basis and form a part of the cost structure.
Advantages
Below are some of the advantages.
- It helps the company to run the business operations of the company smoothly since all the direct and indirect cost needs to be paid on a timely basis.
- It helps the management to know the exact requirement of the company to remain in the business by analyzing the cost structure.
- It helps the management to prepare a detailed business plan for the future since they are already aware of the costing and the cost structure of the product, thus giving them the benefit to project the cost for the company in the years to come.
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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