Common costs are expenses that impact a business as a whole, rather than a specific aspect, and cannot be allocated to a particular department or project. They can be fixed or variable and are managed to improve a company’s financial standing.
Common costs are types of business expenses that have some impact on companies in general, without the ability to allocate those expenses to a specific aspect of a company’s operation. In general, a common cost will provide benefits that are related to a number of functions within the business environment, making it impossible to charge that expense to a specific department, project, or product. Sometimes known as an indirect expense or a joint cost, a common cost is typically accounted for in the general operations of a business with the accounting process recognizing that the cost provides benefits to the business as a whole, not just one segment or aspect.
One of the easiest ways to understand the underlying concept of common cost is to consider the salary and benefits paid to a train engineer. Without the engineer, the train will not travel, and as a result, there will be no passengers to ride the train. In order to use the train as a revenue-generating asset, the railway must employ the engineer, even if there are currently no passenger reservations for the route. In this scenario, the engineer’s salary and benefits are a common cost that ultimately benefits the railroad’s ability to offer services and generate revenue, and as a result has an effect on the overall business function.
Although a common cost implies an expense that has some effect on the business operation as a whole, this does not mean that companies will not take steps to control the amount of this type of expense. Like any other type of expense, a common cost can be fixed, meaning the amount doesn’t change from one accounting period to the next. At other times, a common cost may be considered flexible or variable, and subject to review in terms of finding ways to eliminate waste and keep that cost within a certain range. Even with a fixed common cost, companies often compare different options in terms of how to reduce that fixed cost in future periods. Managing these costs can help improve a business’s bottom line and allow the company to be more financially sound as well as compete more effectively in the marketplace.
All types of business operations experience some type of common cost. The exact nature of these types of expenses will vary, depending on the details of the business model. Fortunately, generally accepted accounting principles allow for the identification of this type of expense and provide specific guidelines for accounting for expenses within the accounting records a business maintains, making the task of tracking expenses much easier.
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