Common cost
A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot’s wage is caused by any one passenger taking the flight.
Common cost, also known as indirect cost or overhead cost, is a type of expense that is not directly associated with the production of goods or services. These costs are necessary to keep the business running, but they are not directly related to the products or services that the company is selling.
Examples of common costs include rent for the office space, equipment maintenance and repairs, insurance payments, salaries and wages of administrative staff, and utility bills. These expenses are necessary to keep the business operating efficiently, but they do not directly contribute to the creation of the final product or service.
Common costs are often allocated to different departments or products based on the percentage of their use. For example, the rent for an office space may be allocated based on the square footage used by each department. This allocation allows the business to determine the true cost of each department or product and make informed decisions about resource allocation and pricing.
Understanding common costs is important for businesses of all sizes. By properly allocating these costs, businesses can accurately determine the true cost of their products and services, make informed decisions about pricing and resource allocation, and ultimately maximize profits.
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