Hidden cost

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 .

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 .

Categories of hidden costs

Hidden costs are divided into two categories :

• 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 .

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 .

Examples of Hidden cost

• Overtime Pay: Overtime pay is a hidden cost of production that is not immediately apparent. Overtime pay is usually incurred when employees are required to work more than their standard hours. This often happens when there is an increase in orders or higher than expected demand for the product. Overtime pay can add up quickly and result in a hidden cost of production.
• Equipment Repair and Maintenance: Equipment repair and maintenance is another hidden cost of production that is not always immediately apparent. Machines can breakdown or require servicing over time, which can result in costly repairs or replacements. Additionally, regular maintenance may be required to keep the machines running properly.
• Unforeseen Delays: Unforeseen delays can be a major source of hidden cost of production. Delays can be caused by a variety of factors, such as unexpected weather, machine breakdowns, or unexpected customer demand. These delays can cost the company in terms of labor, materials, and other resources.
• Lost Opportunities: Lost opportunities can also be a hidden cost of production. If a company misses out on an opportunity because of unforeseen delays or unplanned downtime, the lost opportunity could have cost the company more money than the initial cost of production.

Advantages of Hidden cost management

Hidden cost management can be beneficial for businesses, as they can help identify areas of potential savings or inefficiencies. The following are some of the advantages of hidden costs:

• Hidden costs management can be used to identify areas of waste or inefficiency in a business, enabling the business to make cost savings.
• Hidden costs management can provide valuable insight into the true cost of production and help businesses reduce their overall costs.
• Hidden costs management can help businesses to identify any extra expenses that may be incurred as a result of production or maintenance.
• Hidden costs management can help businesses to identify any extra costs that may be incurred due to unforeseen circumstances, allowing them to plan for these costs.
• Hidden costs can help businesses to uncover any potential risks associated with production or maintenance, allowing them to take the necessary steps to mitigate them.

Limitations of Hidden cost

One of the main limitations of hidden costs is that they are difficult to measure and quantify. This is because they are often intangible and hard to accurately identify. Here are some other limitations of hidden costs:

• Hidden costs are not always immediately evident to those involved in the production or maintenance process. This makes it difficult to accurately assess the actual costs associated with production or maintenance.
• Hidden costs can be difficult to anticipate and plan for, since they are often unforeseen and outside of the scope of a company's budget.
• Even if hidden costs are identified and accounted for, it can be challenging to determine how to optimize or reduce them.
• Hidden costs can have a negative impact on a company's bottom line, as they can significantly reduce profits.
• Hidden costs can be a source of significant disruption to production and maintenance processes, significantly reducing productivity and efficiency.

Other approaches related to Hidden cost

A hidden cost is a cost that is not immediately apparent and may not be included in the initial calculations of a project. Other approaches related to hidden costs include:

• Opportunity costs – this is the cost of not taking advantage of an opportunity or alternative course of action.
• Unforeseen costs – these are costs that were not expected or accounted for in the initial budget.
• External factors – these are factors outside of the project that may have an effect on the cost of the project, such as changes in the economy, new regulations, or changes in the market.
• Intangible costs – these are costs that are not easily quantifiable such as the cost of brand damage, customer churn, and loss of reputation.

In conclusion, hidden costs are costs that are not immediately apparent and may not be included in the initial calculations of a project. Other approaches related to hidden costs include opportunity costs, unforeseen costs, external factors, and intangible costs.

Hidden cost — recommended articles

Cost behavior — Cost risk — Direct labor efficiency variance — Non recurring cost — Step cost — Cost avoidance — Product cost — Quality cost — Maintenance strategy

References

• Boje D.M, Sanchez M. (2019), The Emerald Handbook of Management and Organization Inquiry, Emerald Publishing Limited, Bingley, p.47-48
• Cavinato J.L. (2000), Supply Chain and Transportation Dictionary Fourth Edition, Springer, New York, p.141
• Holloway M., Nwaoha C. (2013), Dictionary of Industrial Terms, Scrivener Publishing, New Jersey
• Savall H., Zardet V. (2008), Mastering Hidden Costs and Socio-Economic Performance, Information Age Publishing, Paris, p. 28-28

Footnotes

Author: Aldona Pająk