A fixed cost is a type of expense that does not change. In accounting, it means the amount remains the same over several periods. Usually, companies view this cost according to the activity levels over that period. Therefore, a fixed cost is an expense that does not change regardless of activity levels over different periods.
A fixed cost is a classification of expense within managerial accounting. Companies may also further classify it into other types, including traceable and common. Before discussing the difference between them, it is crucial to view them individually.
What is a Traceable Fixed Cost?
A traceable fixed cost is directly attributable to a specific segment, product, or department within a company. In other words, it is an expense associated with a responsibility center. Traceable fixed costs are the direct opposite of common fixed costs. These costs are easier to manage in managerial accounting as companies can trace them to their origin.
Traceable fixed costs are crucial for management decisions. They allow managers to make informed decisions about the profitability of a particular responsibility center. Due to their nature, these costs are easier to plan and budget since they depend on their specific center. Despite the link to that center, these costs are still static.
What is a Common Fixed Cost?
Common fixed costs are similar to direct costs. These costs are not directly traceable to specific segments, products, or departments. In other words, these are expenses not directly associated with a responsibility center. Instead, various centers share these costs. An example of these costs is utilities, where several departments or segments use the same connection.
Like traceable fixed costs, common fixed costs affect management decisions. However, companies must allocate and divide these costs before further analysis. Usually, companies use costing methods and techniques to assign common costs to the responsibility centers. While still fixed, these costs may differ from one department to another based on the allocation basis used.
What are the differences between Traceable and Common Fixed Costs?
The differences between traceable and common fixed costs come from the point below.
Definition
Traceable fixed costs are directly linked or associated with a specific responsibility center. On the other hand, common fixed costs are shared by various areas or segments, making them untraceable to a particular one.
Allocation
Allocating traceable fixed costs is straightforward. Companies assign the whole amount for the expense to the responsibility center to which it relates. However, common fixed costs do not originate from a specific area. Therefore, companies must use allocation techniques to assign them to different centers.
Control
Controlling traceable fixed costs is straightforward as they relate to a specific segment or center. However, the same does not apply to common fixed costs. Since many factors contribute to the latter category, controlling and eliminating them is more challenging.
Management
Typically, the management of traceable fixed costs lies within the center where it originates. For common fixed costs, the company or project maintains these costs.
Conclusion
Traceable fixed costs are an expense that originates from a single area, whether segment, product, or department. Due to this feature, they are usually easier to allocate and manage. On the other hand, common fixed costs are shared by various areas within the company. Companies must assign these costs to the relative centers based on an allocation basis.
Article Source Here: Traceable and Common Fixed Costs: Definitions, Differences, Examples, Formula
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