Non recurring cost

Non recurring cost
See also
Conversion cost Tooling costs Hidden cost Cost element Committed cost Irrelevant cost Cost avoidance Indirect material Functional budget

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 :

• 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 .

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) :

• 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 .

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) .

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 .

Examples of Non recurring cost

-*Design costs: These costs are incurred when designing a product or system, including the research and development costs, prototyping, and testing costs.

• Tooling costs: Tooling costs are incurred when the tooling required to manufacture a product is purchased or leased.
• Start-up costs: These costs are associated with the initial set-up of a production process, including the purchasing of machinery, installation, and training costs.
• Legal costs: Legal costs are incurred when a company has to obtain licenses and permits to carry out its operations.
• One-time engineering costs: These costs are incurred when a company needs to hire an engineer to design a product or system, or to make modifications to an existing design.
• Research and development costs: These costs are associated with the development of a product or system, including the costs of research and experimentation.

Advantages of Non recurring cost

Non-recurring costs can be advantageous for businesses because of their one-time nature, which allows for more efficient budgeting and improved long-term financial planning. Specifically, the following advantages can be identified:

• A one-time payment can reduce the financial burden of having to pay for a service or product more than once.
• Non-recurring costs are easier to plan for, as they are not subject to unexpected changes or fluctuations.
• Companies can more accurately predict their expenses and profits when non-recurring costs are taken into account.
• Non-recurring costs are generally cheaper than recurring costs, as the service or product is only purchased once.
• One-time costs can help businesses maximize their profits by providing a more predictable budget.

Limitations of Non recurring cost

Non-recurring costs often have a significant impact on the cost of a product or system. However, there are certain limitations associated with them, including:

• They are often difficult to predict, as their timing and magnitude can be highly variable.
• They may be difficult to include in budgeting, as they can be unpredictable and may require additional resources.
• Their impact may be difficult to quantify as they are often lumped together with other costs.
• They can be difficult to control, as they are largely outside the scope of the organization’s normal operations.
• They can be difficult to account for and may not be tracked in the same way as recurring costs.

Other approaches related to Non recurring cost

Non-recurring costs can also be categorized under different approaches such as the following:

• Design Costs: These are the costs associated with the design and development of a product or a system. This includes the cost of research, engineering, prototyping, and testing.
• Manufacturing set-up costs: This includes the cost of purchasing, installing, and running the equipment and machinery necessary for manufacturing the product.
• Tooling costs: This includes the cost of constructing and maintaining jigs, moulds, dies and other tools used to manufacture the product or a system.
• Regulatory compliance costs: This includes the costs related to the legal and regulatory requirements of the product or a system.
• Quality control costs: This includes the costs related to ensuring the quality of the product or a system.

In summary, non-recurring costs are those that are associated with the design and development, manufacturing set-up, tooling, regulatory compliance, and quality control of a product or a system.

References

• Amberg M., Herold G., Kodes R., Kraus R., Wiener M. (2005), IT Offshoring-A Cost-Oriented Analysis, "Manuscript for the CISTM"
• Anderson L.K (2019), Accounting for Government Contracts-Cost Accounting Standards, LexisNexis, New York, 10.08[7][c]
• Arora M.N. (2012), A Textbook of Cost and Management Accounting, Vikas Publishing House, New Delhi, p. 22.21
• Leonard B. (2009), GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs, DIANE Publishing, Washington, pp. 101-102
• Parnell G.S., Driscoll P.J., Henderson D.L. (2011), Decision Making in Systems Engineering and Management, John Wiley & Sons, Hoboken, 5.2.1
• Shermon D., Gilmour M. (2017), Cost Engineering Health Check: How Good are Those Numbers?, Routledge Taylor & Francis, Abingdon, pp. 101-102
• Stewart R.D. (1991), Cost Estimating, John Wiley & Sons, New York, p. 39

Author: Paulina Zachara