Non recurring cost

Non recurring cost
See also

Non-recurring costs arise only once in the whole life cycle of a product (or a system). On the other side, recurring costs are simply those costs which repeat during the production process. Among non-recurring costs, the following can be distinguished [1]:

  • engineering,
  • designing,
  • testing,
  • other non-production activities which are not predicted to occur again.

Recurring costs vs. non-recurring costs

Predominantly, non-recurring activities lead to recurring activities. What is worth mentioning is that non-recurring activities use available resources once. Results of such activities like the set-up of production machinery or the design of tooling do not need to reoccur. In contrast, recurring activities, as their name indicates, consume resources repetitively. Among them, we can enumerate the raw materials required to produce a finished good or the labour necessary to assemble a final product.

As a consequence, a unit cost of product could be calculated either as a recurring cost (e.g. production cost) divided by quantity (units manufactured), or a recurring costs plus a non-recurring cost (e.g. development cost) divided by the same quantity [2].

Life-cycle cost analysis

Both non-recurring and recurring costs are taken into consideration while conducting a life-cycle cost analysis (LCCA) which is a technique used by management in order to evaluate the economic performance of investments.

Examples of initial one-time costs (non-recurring costs) [3] [4]:

  • installation costs
  • transport and handling costs
  • purchase costs
  • documentation costs
  • costs of relocating plant and equipment
  • pre-production engineering costs
  • costs of testing equipment
  • special tooling costs

Costs that are categorized as recurring costs are, for instance, operating costs, maintenance and repairs, cost of changes and upgrading, cost of disposal because they are incurred over the product's lifetime. Therefore, life-cycle costs are the so-called womb to tomb or cradle to grave costs [5].

How to account for non-recurring costs?

Costs should be expensed at the time of incurrence if they would have been incurred anyway (like administration and oversight of a contract, planning and analysis, administrative and financial support).

Other costs resulting from extraordinary operations should be accumulated separately and treated as a deferred cost, which would be then amortized over the maximum time span of five years (time when a company expects the benefits of the non-recurring costs to accrue) [6].

The importance of differentiating costs

The main purpose of dividing costs into recurring and non-recurring is to properly apply them to learning curves. Especially, as far as recurring costs are concerned, improvement of cost is related to processes and actions that are repetitive. Moreover, the amount of such costs incurred results from the output. Hence, differentiating recurring from nonrecurring costs enables analysts to clarify the data and find out how much of the total cost is influenced by learning [7].

Footnotes

  1. Parnell G.S., Driscoll P.J., Henderson D.L. 2011, 5.2.1
  2. Shermon D., Gilmour M. 2017, pp. 101-102
  3. Arora M.N. 2012, p. 22.21
  4. Anderson L.K 2019, 10.08[7][c]
  5. Arora M.N. 2012, p. 22.21
  6. Anderson L.K 2019, 10.08[7][c]
  7. Leonard B. 2009, pp. 101-102

References

Author: Paulina Zachara