Incurred cost

Incurred cost
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Incurred cost is an accounting term used in cost accounting process which refers to a moment in the company’s operating cycle, when an asset or a resource is used and an expenditure is registered in the company’s accounting books. To simplify this term, incurred cost occurs when a firm’s asset is used or the company becomes liable for the usage of this particular asset in the production process. Such assets are not recognized as a resource anymore and become an expense. The concept of accrual accounting demands from the companies to register expenses in the accounting books not on the date of payment, but when they are incurred. Thanks to this solution, the expenses and connected to them revenues are posted in the same accounting period. In accounting, such theory is called the matching principle. Under GAAP (Generally Accepted Accounting Principles) requirements, matching principle shall be used in every company‘s financial accounting and financial statement to present the reliable financial data[1].

Incurred cost in cost accounting[edit]

In order to fully understand the incurred cost term, a definition of cost accounting has to be described. Cost accounting is the process used to classify costs and to be able to analyze expenses, which will allow the total cost of each unit of production to be determined with appropriate level of accuracy and, in the meantime, to present precisely how such total cost is established[2]. That is why cost accounting is used for classification, recording and proper distribution of incurred costs in order to correctly determine the costs related to services or products, and for the presentation of appropriately organized data for the purpose of management’s control and guidance. More precisely, cost accounting is a procedure, which starts with recording revenue and expenses in the accounting books and finishes when the statistical data are arranged. This formal mechanism helps to determine and control incurred costs related to products and services[3]. Cost accounting enables to analyze and classify expenses, what allows to determine the total cost of any given service or product with honest level of certainty, and in the meantime, to show precisely how the total cost is established. As an example, for the management it is not enough to know what is the incurred cost of production of one pencil, but they also want to know how much does the material used cost, what was the cost of labor and other related to this product, incurred costs in order to control and - if possible - reduce the cost of production. Cost accounting allows to calculate appropriate budgets and costs, such as[4]:

  • actual cost of operations,
  • product cost,
  • department cost,
  • processes cost.

It also helps to analyze the profitability, deviations and use of funds by the society. That is why cost accounting is a method which enables to[5]:

  • collect,
  • interpret,
  • summarize,
  • classify,

information used to determine the costs of product, control and operation planning and decision making[6].

Footnotes[edit]

  1. The Institute of Company Secretaries of India 2014,Cost and Management Accounting, The Institute of Company Secretaries of India, p. 21
  2. Directorate of Studies The Institute of Cost Accountants of India 2018,Cost accounting, Kolkata, p. 2
  3. J. Anbarasu 2008, Basics of Cost Accounting, Bishop Heber College, p.1
  4. Directorate of Studies The Institute of Cost Accountants of India 2018,Cost accounting, Kolkata, p. 2
  5. Directorate of Studies The Institute of Cost Accountants of India 2018,Cost accounting, Kolkata, p. 2
  6. Directorate of Studies The Institute of Cost Accountants of India 2018,Cost accounting, Kolkata, p. 2

References[edit]

  • Anbarasu J.(2008), Basics of Cost Accounting, Bishop Heber College, p.1
  • Directorate of Studies The Institute of Cost Accountants of India (2018), Cost accounting, Kolkata, p. 2
  • The Institute of Company Secretaries of India (2014),Cost and Management Accounting, The Institute of Company Secretaries of India, p. 21

Author: Justyna Piekorz