Incurred Cost Meaning Examples Top 10 Types Of Incurred Cost

Incurred Cost Meaning

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

Every company needs to plan its expenses most conservatively since they are the lifeline of the business and are required to be paid on time.A thorough analysis of the company’s cost structure will help the management make some strategic decisions that will impact the company’s growth story.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.read more, it needs to consider both cash and no-cash expenditures to arrive at the correct cost for the product.Since the company’s selling price depends upon the cost incurred, many companies try their best to keep the cost low by not allocating expenses that are not that relevant to 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

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Manufacturing Cost refers to the cost incurred to convert 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.No-Manufacturing Cost: It refers to all the costs incurred, which are not manufacturing in nature, i.e., it includes 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.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.read more refers to the company’s fixed expenses to run the business. It includes rent, salaries, and otherOther 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 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.Variable Cost: Variable Cost refers to the cost incurred for the product to be sold in the open market.Capital cost refers to the cost incurred for buying a capital asset.Direct Cost: Direct CostDirect CostDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more refers to the cost incurred to convert raw materials into finished goods and is directly related to the company’s finished product.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.read more refers to the cost incurred to make the product saleable. The entire cost of the product is done by considering 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 goingSunk 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 company’s decision-making.

Examples of Cost Incurred

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

Rentals: It refers to the amount the company spends at the beginning of the year to reap 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 must 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 must be recognized as a liability onA 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.read more 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.read more.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.
read more refers to the benefits gained from using the Asset over the period. Even if it is a non-cash Expenditure, it must be booked as an expense in the Income Statement.Salaries: It refers to the fixed expense paid to the company’s employees 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.read more running.Sundry Expenses: These are miscellaneous expenses incurred by the company daily and form a part of the cost structure.

Advantages

Below are some of the advantages.

It helps the company to run its business operations smoothly since all the direct andIndirect 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.read more indirect costsIndirect 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.read more need to be paid on a timely basis.It helps the management know the exact requirement of the company to remain in the business by analyzing the cost structure.It helps the management prepare a detailed business plan for the future since they are already aware of the cost and the cost structure of the product, thus giving them the benefit of projecting the cost for the company in the coming years.

Disadvantages

A higher cost structure in the early stages of the company may result in a greater liquidity crisis due to excessive costing.Some costs are non-cash in nature and hence do not impact the actual costing.

Conclusion

The cost incurred by the company right from its early stages plays a crucial role in its long-term survival. Generally, the companies in their early stages incur more costs than the established ones 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.