Traceable and Common Fixed Costs
Fixed cost is the cost that will occur regular basis regardless of the production quantity. The cost will remain the same over a period of months, quarterly and annually. Fixed cost will not change based on the production while the variable cost will change depending on the number of production.
In the past, we believe that the fixed costs remain the same regardless of the business operation. However, now we can separate the fixed cost by different cost objects such as segment, location, and so on.
A fixed cost is a monetary amount that does not fluctuate with changes in the level of output or business activity. It is one of the two main types of costs incurred by businesses, the other being variable costs. Fixed costs are sometimes also referred to as overhead costs. They are considered to be part of the cost of production, along with variable costs, and are therefore used in the calculation of total cost.
Businesses incur fixed costs in order to be able to carry out their activities. These costs cannot be avoided and so must be paid even when there is no revenue coming in. Common examples of fixed costs include rent, salaries, insurance, and interest on loans. As businesses strive to reduce their overhead expenses, understanding which costs are fixed and which are variable is essential. This knowledge can help managers make informed decisions about where to cut expenses without adversely affecting production levels or compromising the quality of their products.
Traceable Fixed Cost
Traceable fixed cost is the fixed cost that the company is able to allocate to a specific segment, process, product, customer, location, or business unit. This fixed cost will depend on these variables. If these cost objects disappear, the cost associates will not happen too. These are the controllable fixed cost when we can control the cost object. However, it will be fixed when we execute the cost object.
This kind of cost should be separated into the income statement which helps management to make a decision. They may decide to continue or shut down any unprofitable product, process, or cost object.
Moreover, it helps us to prepare an income statement for each product, segment, region, and so on. It will help the management to access each category’s performance across the whole company. They can boost the performance of the most profitable and shut down the low performance.
Traceable Fixed Cost Example
These are the example of traceable fixed costs which associate with
- Country manager’s salary: it is the traceable fixed cost for the branch or location in which the business is operating. It can be allocated to the segment, country, or even future detail.
- Salary of staff who work directly in that region: The total salary paid to employees in one location is the traceable fixed cost of that specific location. It is also the traceable cost of the product if the company has the proper allocation.
- Office Rental: The rental expense can be traced to the company location or branch.
- Utility expense: The utility expense will be traced to the office or warehouse as well.
Common Fixed Cost
Common Fixed cost is the fixed cost that supports the business activities of the two or more business segments. It is very hard to separate the cost from each segment or unit. It is the cost that is paid in total to cover all cost objectives in different business units, locations,s and so on.
Fixed cost is a type of business expense that does not fluctuate with changes in production or sales volume. It is a cost that a company incurs regardless of whether it is doing business or not. The common fixed cost is the cost that a company spends to provide benefits to all branches, locations, and segments. It is not easy to spread the cost to each item.
Common Fixed Cost Example
These are the example of common fixed cost:
- Salary of CEO who manage all the business segments. The CEO works for all products, locations, and branches, so it is hard to allocate the time spend on each unit. The company may use the timesheet to allocate the time spend, but it does not accurately reflect the real world
- Salary of the department who work at group level and benefit to all country office. It happens when the company has a central office to support each business unit.
Traceable Cost can become a Common Cost
The traceable and common fixed costs can be mixed together when the company has many segments. One cost can become a traceable fixed cost for one segment and a common cost for another.
For example, the depreciation expense of the machinery is the fixed cost for the company. It is the traceable fixed cost for each location. The company can separate the cost base on the depreciation expense of the location unit.
However, if the machinery is used for the production of many products. It will become the common fixed cost for the products.