Hidden cost

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Hidden cost
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Hidden cost - according to dictionary of Industrial terms it is all costs associated with either production or maintenance. When associated with maintenance, hidden costs represent the loss associated with unplanned downtime. Typically, hidden costs represent between 1-3% of a company's revenues or, potentially between 30-40% of profits. These are the losses associated with unplanned downtime [1].

In logistics hidden costs mean costs which are almost impossible to determine without a cost allocation process from the data available in conventional financial statements are commonly referred to as hidden costs. They are hidden because they are usually a part of a more general costs. Examples are manager's time, inventory opportunity costs, or interests costs over the period [2].

Categories of hidden costs

Hidden costs are divided into two categories [3]:

  • hidden costs incorporated into visible costs - this costs are diluted into different costs account.
  • opportunity costs

Hidden costs and performances thus affect both the enterprise's immediate results and its creation of potential, that is, actions currently carried out to ensure the results of future years. Thus, they constitute potential reserves, budgetary maneuver margins for improving the enterprise's economic performance. Given these dynamics, an overall approach to the enterprise is required to explain the level and mechanism of a firm's financial performance. So, organizational dysfunctions will generate hidden costs, which are not considered, either in accounting information systems or in decision-making models [4].

Components of hidden costs

Hidden costs are the monetary translation of regulation activities. This link was modeled on two axes. First, the basic dysfunction, which are concrete disturbances or abnormal operations, have been grouped together into five indicators that are considered as families of dysfunction: absenteeism, work accidents, personnel turnover, quality defects, and direct productivity variance or non-production (missed production). Second, regulation of dysfunctions which are grouped together into two types of activities: human activities and product consumption (goods and services). This classification of regulations is then applied to hidden cost evaluation, which involves six components. The first three components constitute overcharges the organization could avoid, at least partially, if its dysfunction level was not so high - excess salary, overtime, and over-consumption. The fourth and fifth components non-production and non-creation of potential are not liabilities as such, but can be described as non-products, that is, a loss of value, so called opportunity costs resulting from the dysfunctions. The sixth component refers to the risk suffered by the company due to dysfunctions [5] [6].

References

Footnotes

  1. Holloway M., Nwaoha C. (2013)
  2. Cavinato J.L. (2000)
  3. Boje D.M, Sanchez M. (2019)
  4. Boje D.M, Sanchez M. (2019)
  5. Savall H., Zardet V. (2008)
  6. Boje D.M, Sanchez M. (2019)

Author: Aldona Pająk