Traceable Fixed Costs and Common Fixed Costs: Distinguishing Cost Categories for Financial Reporting
Overview
This paper explains the distinction between traceable fixed costs and common fixed costs in business accounting. It defines traceable costs as those with a cause-and-effect relationship to a specific business segment, using a monitoring and evaluation division manager's salary as an example, while common fixed costs like CEO salaries cannot be attributed to any particular segment and are incurred to support multiple sectors.
What this coursework covers
- Definition and characteristics of traceable fixed costs with cause-and-effect relationships to business segments
- Explanation of common fixed costs that support multiple sectors and cannot be traced to specific divisions
- Discussion of costs that may be classified differently depending on the business perspective and importance for financial reporting compliance
Preview
Traceable fixed costs and Common fixed costs
The Definition of "Traceable Costs" by E.M. Rawes defines traceable cost as a fixed cost that possesses a cause-and-effect relationship with a process or an entity. These costs exist due to the creation of a segment within a business. A typical example is, if a company does not have a monitoring and evaluation division, then it will not have a monitoring and evaluation manager who will be paid a salary. If the monitoring and evaluation division does not exist, then the cost of the division manager's salary is not factored in. Moreover, if the monitoring and evaluation division ceased to exist, the cost of the division manager's salary will not exist. Hence, the expenses on the manager's salary are specifically traceable to the monitoring and evaluation division.
Common fixed costs cannot be traced to a particular segment within the business. These costs are incurred from funding individuals, resources, or activities that support multiple sectors within the company. For instance, the CEO's salary is a common fixed cost, as the salary cannot be traced to any particular segment within the business. The business will not do away with the CEO's pay by scrapping off a specific sector. However, there is a fixed cost that may be considered traceable by one section but common by a different segment. Distinguishing between these fixed costs is essential when submitting annual reports as required by the Financial Accounting Standards Board.
References
Rawes, E. (2020). The Definition of "Traceable Costs".