Common costs are types of business expenses that have some impact on companies in general, without the ability to assign those expenses to a specific aspect of a company operation. Generally, a common cost will provide benefits that are related to a number of functions within the company setting, making it impossible to charge that expense to a specific department, project, or even product. Sometimes known as an indirect expense or a joint cost, a common cost is normally accounted for in the general operations of a business with the accounting process recognizing that the cost provides benefits for the overall business, not just one segment or aspect.
One of the easiest ways to understand the underlying concept of the common cost is to consider the salary and benefits paid to the engineer of a train. Without the engineer, the train will not travel and as a result there will be no passengers to ride the train. In order to be able to make use of the train as a revenue-generating asset, the railway must employ the engineer, even if there are currently no passenger bookings for the route. In this scenario, the salary and benefits of the engineer are a common cost that ultimately benefits the ability of the railway to offer services and generate revenue, and has an effect on the overall function of the company as a result.
While a common cost involves an expense that has some effect on the business operation as a whole, this does not mean companies will not take steps to control the amount of these types of expenses. Just like any other type of expense, a common cost maybe fixed, meaning that the amount does not 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 will often compare different options in terms of how to go about lowering that fixed cost in upcoming periods. Managing these costs can help improve the bottom line of a business and allow the company to be stronger financially and also compete more effectively in the marketplace.
All types of business operations experience some form of common cost. The exact nature of these types of expenses will vary, depending on the particulars of the business model. Fortunately, generally accepted accounting principles allow for the identification of this type of expense and provide specific guidelines for posting the expenses within the accounting records maintained by a company, making the task of tracking the expenses much easier.
