Incurred cost is a term used in accounting to refer to the cost of goods or services that have been consumed or used, but have not yet been paid for. Incurred costs are recognized as expenses when they are incurred, regardless of when the actual payment is made.
Examples of Incurred Costs
- Raw materials and supplies that are used in the production of goods. For example, a manufacturer may incur the cost of steel and aluminum to produce car parts.
- Rent and utilities for a manufacturing facility. For example, a company may incur the cost of rent for a factory and the cost of electricity, water, and gas to operate the facility.
- Wages and salaries for employees. For example, a company may incur the cost of paying its employees for the hours they work.
- Professional fees for legal or consulting services. For example, a company may incur the cost of hiring a law firm to handle a legal dispute or a consulting firm to provide strategic advice.
There are several types of incurred costs that companies may need to consider:
- Direct costs: Direct costs are costs that are directly related to the production of goods or delivery of services. For example, the cost of raw materials and supplies used in the production of goods is a direct cost.
- Indirect costs: Indirect costs are costs that are not directly related to the production of goods or delivery of services, but are necessary to support the business. Examples of indirect costs include rent, utilities, and insurance.
- Variable costs: Variable costs are costs that vary in proportion to the volume of goods or services produced. For example, the cost of raw materials and supplies used in the production of goods is a variable cost, because it increases as the volume of goods produced increases.
- Fixed costs: Fixed costs are costs that do not vary with the volume of goods or services produced. Examples of fixed costs include rent and salaries.
How to Manage Incurred Costs
To manage incurred costs, companies can take a number of steps, such as:
- Monitoring expenses closely to ensure that they are necessary and reasonable
- Negotiating favorable terms with suppliers, such as bulk discounts or extended payment terms
- Implementing cost-saving measures, such as reducing waste or using energy-efficient equipment
- Developing and maintaining budgeting and forecasting
Accrual accounting is an accounting method that recognizes revenue and expenses when they are earned or incurred, rather than when cash is received or paid. The use of accrual accounting allows companies to more accurately match revenues and expenses to the period in which they are earned or incurred, which provides a more accurate representation of the company’s financial performance.
Under the accrual method of accounting, expenses are recognized when they are incurred, regardless of when the actual payment is made. This means that expenses are recorded in the period in which they are used or consumed, rather than in the period in which they are paid.
For example, if a company incurs expenses in January for goods or services that will be received in February, the expenses will be recorded in January, even if the payment is not made until February. This allows the company to more accurately reflect the cost of the goods or services in the period in which they were used, rather than in the period in which the payment was made.
The use of accrual accounting and the recognition of expenses when they are incurred is important because it provides a more accurate representation of a company’s financial performance and financial position. It allows investors and other stakeholders to better understand the company’s operating results and the underlying trends that drive its business.
The above is for informational purposes only and should not be taken as tax advice or professional advice. Please consult a licensed professional.