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 structureCost StructureCost Structure refers to those costs or expenses (fixed as well as variable costs) which businesses will incur or will have to incur to produce the desired objective of the business; such costs include the cost of purchasing the raw material to the cost of packaging the finished products., 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 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., 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. 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 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..
- Fixed Cost: Fixed costFixed CostFixed Cost refers to the cost or expense that is not affected by any decrease or increase in the number of units produced or sold over a short-term horizon. It is the type of cost which is not dependent on the business activity. 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. 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 CostDirect CostDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc. 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 CostProduct CostProduct cost refers to all those costs which are incurred by the company in order to create the product of the company or deliver the services to the customers and the same is shown in the financial statement of the company for the period in which they become the part of the cost of the goods that are sold by the company. 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.
- 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 SheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company..
- Depreciation: DepreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. 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 operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation. 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.
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 costIndirect CostIndirect cost is the cost that cannot be directly attributed to the production. These are the necessary expenditures and can be fixed or variable in nature like the office expenses, administration, sales promotion expense, etc. 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.
- 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.
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.
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 –