Traceable and Common Fixed Costs

Definition:

Traceable Fixed Costs can be defined as fixed costs that can be specifically attributed to a particular and a specific segment in the business. During the normal course of the business, it can be seen that there are numerous different costs that are associated with a company, and hence, it is important to be able to identify which costs are associated with which specific departments within the company.

On the other hand, traceable fixed costs are costs that are incurred as a common denominator, irrespective of different departments existing within the company. These are the costs that are incurred regardless of different operations existing within the business domain.

Explanation:

The idea behind segregating fixed costs into traceable and common fixed costs predominantly lies on the grounds of ensuring that companies are able to identify areas within the company that are incurring higher fixed costs.

For example, there are certain fixed costs that are specific to certain functions or certain lines of operations within a business. It becomes imperative to consider these costs in order to get a fair idea of the profitability of a certain segment.

For example, a company might have numerous different divisions, under which they are meant to serve numerous different areas. In the case where there is a dip in the profitability of the company, the decision-makers of the company are likely to close down that particular unit.

However, in order to find out which particular unit is not performing well, there needs to be a proper cost-benefit analysis, which will help companies to understand the costs associated with that particular division and the relevant benefits associated with it. The costing segregation is eventually going to help them make this particular decision.

On the other hand, as far as common fixed costs are concerned, these are the costs that are incurred regardless of the number of departments that are functioning within a company.

It is also important to have an idea about those costs, so that company can effectively work to reduce those costs or spread them over a larger number of operations, in order to inch towards achieving economies of scale.

Example of Traceable Fixed Costs and Common Fixed Costs

Traceable fixed costs are costs that can be individually attributed to the company’s certain operative unit. The following example illustrates traceable fixed costs for the company.

Cola Inc. operates in the beverage segment globally. It is a multinational that operates in numerous different locations. They have plants operating in Ethiopia, Egypt, and Galle. All the plants are on leased properties, and Cola Inc. also has representation in those countries.

However, the head office is situated in Montreal, and that is where all the operations are headed. This is the decision-making hub, and here is where all the marketing decisions are taken by the company.  

In the scenario above, the traceable and common fixed costs can be segregated, in the following manner:

Traceable Fixed Costs of Cola Inc.

The following costs can be identified as traceable fixed costs for Cola Inc.

  • Leasing costs for the factories operating in Ethopia, Egypt and Galle.
  • The salaries of the managers, and other overhead costs associated with the factories there.
  • All the overhead expenses that are occurred in the head office, in order to manage these locations remotely.

Common Fixed Costs of Cola Inc.

The following can be described as common fixed costs for Cola Inc.

  • The office rental in the head office, which is situated at Montreal.
  • The salaries of the office staff that is present there.
  • All overhead expenditures that cover operations across all the locations of Cola Inc.

Is Depreciation a Traceable Fixed Cost or a Common Fixed Cost?

There is often certain ambiguity regarding treatment of depreciation. The fact that whether depreciation should be charged as a traceable fixed cost, or a common fixed cost depends on the usage of the machinery.

In the case where the machinery is used specifically for a project, the depreciation on that particular machinery is going to be regarded as a traceable fixed cost. On the other hand, if the machinery is used commonly in the business, then it would be treated as a common fixed cost.

Regardless of the fact that depreciation in itself is a traceable fixed cost, since it can be attributed to specific machines, yet it can be seen that it is only treated as a traceable cost if the utility of that particular machinery is shared between different projects within the company.

What Makes the Cost of Goods Sold Decrease?

Cost of goods sold refers to the costs involved in making the goods or services that are being sold. It is basically the direct materials, direct labor, and direct expenses involved in making the products.

These are easily traceable costs and can be easily identifiable from looking at the products. The other costs that cannot be easily traceable and cannot be linked to the product are not associated with being the cost of goods sold.

Statement of Cost of goods sold

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (supplies)X 
– Purchases returnsX 
+ Direct labor (salary, wages)X 
Cost of goods and services XX
– Ending inventory (X)
Cost of goods sold XX

It’s very simple to make rational guess about what can decrease the cost of goods sold. Some of them are listed below with detailed explanation:

The Decline in Cost of Direct Material

  1. The entity shall buy goods in bulk at a discounted price. In this way, it will entirely decrease the cost of buying raw materials for the finished goods.
  2. Application of the Economic order quantity concept would reduce the carrying and holding cost including the shipping cost. This would help in reducing great deal of direct material costs.
  3. Negotiation with the suppliers regularly helps to sweeten the deal and can lead to a reduction in the cost of raw materials. Further, constant lookout for suppliers with the best quality of raw materials at the best price is helpful in the long term.
  4. Reduction of costs through the use of advanced technology in production
  5. Efficient utilization of all the resources creating as little waste as possible. All the operations need to be audited in order to locate the source of waste and appropriate action needs to be taken accordingly.
  6. When the cost of raw materials is not to change in foreseeable future, the markets remain nonvolatile and the cost of production doesn’t increase. If one feels that the prices of raw materials would increase in the future, the buyer can enter into a long-term agreement with the supplier.

The Decline in the Cost of Direct Labor

The two possible ways to reduce the direct labor cost are by negotiating better hourly rates with the laborers at work or to increase the efficiency of the labor. The labor agreements should be made in such a way that it promotes discipline and hard work enhancing efficiency.

Enhancing efficiency would mean reducing the wastages like idle time, minimizing set up time, and minimizing time to operate machines. The labor agreements should also be incentive bases so that it increases quickness among the employees.

Others Factors:

  • Moving manufacturing to the onshore location: If the production cost within a country is large enough, the company can shift plan location or production to a comparative non-expensive area with low production costs.
  • Automation of Work processing/Use of machines: The machines are available for every job that man can do. Despite the high initial costs of purchasing machines, over the long term, the machines are more efficient and also reduce the cost of goods sold drastically over this long period.

Cost of goods sold of the real estate business

How does a real estate company work?

Real estate consists of property such as land, buildings, and any natural resource. Real estate also includes commercial properties such as offices, stores, hotels, services, and other businesses. Industrial properties include structures used in manufacturing, such as factories, warehouses, and research centers.

The real estate business primarily used to be buying and selling properties for gains. However, this has evolved recently and the real estate business now is more inclined towards a mix of selling and providing properties for commercial spaces.

If a real estate company is involved in the construction of their own properties, all the costs of construction shall also form part of the cost of goods sold.

Cost of goods sold by Real estate business

For real estate companies, the cost of goods sold shows up when the company builds develops for-sale properties. The company may engage to build an apartment complex and sell various units one by one. Cost of goods sold refers to the costs involved in making the goods or services that are being sold.

It is basically the direct materials, direct labor, and direct expenses involved in making the products. The tax jurisdictions may apply to how real estate companies apply or assign costs to the construction of such properties. On the basis of nature, there are primarily hard costs and soft costs in real estate development.

1) Hard Costs

In real estate development, hard costs are construction costs associated with the actual physical construction of the property. Based on industrial averages, hard costs make up 70-80% of the total new construction costs.

Further for renovation projects, this inclines further north of the given range. Hard costs also include material abatement, masonry, doors, plaster, drywall, flooring, etc.

2) Soft costs

On the other hand, soft costs are part of the overall development project. These are however not linked to the actual physical production of the asset. These deal basically more with softworks as dealing with consultants, preparing project reports, and making planning for the project. These are pre-construction costs and the majority of the costs are incurred prior to the start of construction. Soft costs also include:

  • engineering costs
  • permits & approval costs
  • inspections
  • legal and insurance costs

The soft cost paid at the beginning of the project and during construction is the Financing Cost. During the initial stage of the development of the project, bridge loans, appraisal fees, Financing Fees, etc. may be seen.

Statement of Cost of goods sold

Real estate companies

ParticularsAmount ($)Amount ($)
Property taxesX 
Management feesX 
Cleaning and maintenanceX 
RepairsX 
SuppliesX 
Leasing commissionsX 
Licenses and permitsX 
Professional feesX 
UtilitiesX 
Property InsuranceX 
Cost of goods sold XXX

Cost of goods sold for the hair salon

Hair salon Business Model

A hair salon business model includes the different sources of business that is services and retail sales, a hair salon has, value the hair salon delivers like the coloring of hair, pricing the value and the type of customer who pays for it. Understanding the business model is vital to understand the cost model which we discuss later on. Hair salon works on various payment models.

The Fee-For-Service Salon Revenue Model is simply the traditional pay as you get served, model. Under the salon subscription model, a pre-determined fee is charged for the contracted period rather than per transaction.

This subscription model is used by newspapers, televisions, etc. Under Salon Advertising Revenue Model, the salon charges other businesses for advertising space in their channels.

Under the Production Revenue Model, hair salon creates value by targeting salesmanship through their premises. They create value by manufacturing and selling finished goods.

Cost of Goods Sold for a Hair salon

The cost of goods sold is the carrying value of goods sold during a particular period. As the hair salons are based on the product and service model, COGS also equates to the cost of products and services sold or rendered.

The hair salon that earns the highest sells more products than its services. The products come with high margins. Further, the services hair salon provides also use most of the supplies of the shop. The various costs for hair salon forming COGS are as follows:

Supplies to assist hair cutting

These are the products that would be needed to perform salon or haircutting services. This would include the following:

  • Cost of cotton bands
  • Cost of bags and trash bags
  • Cost of razors, blades, etc
  • Cost of disinfectant wipes
  • Cost of spray bottles for sanitization purposes
  • Cost of applicator bottles and spa jars
  • Cost of essential oils, shampoos, etc
  • Cost of gloves
  • Cost of various types of bleaches
  • Cost of polishes
  • Cost of soap, essential perfumes, fragrance powder, etc

All the above supplies can be effectively categorized into essential haircutting supplies and the special requirements for clients for various events like interviews, marriage, etc.

The right products in the hair salon are required for its success. All the above costs are also considered as the cost of supplies or the cost of direct materials for haircutting and other services of a hair salon.

Cost of labor

This is the type of service that workers of hair salons would provide on the basis of professional expertise. Cost of labor is computed by charging hourly rates for actual hours worked.

The first step in a hair salon for computing labor cost is to make an estimate of how much time its staff requires to complete the service. The staff can be really slow or the one who adds most experience to the simple jobs of manicure, pedicure, and haircutting.

The hair salon shall also estimate how much products the worker is able to provide rather than simply the number of hours worked. A lot of variables come into play to estimate the cost of labor.

This is the first thing a hair salon should do and standardize the cost of providing service as a whole. The final step would be to establish hourly rates. This will depend again on the type of services required by the client and the amount of satisfaction they get

What should the Cost of service include?

The hair salon can alter or modify services that are prepared to provide for customers. This can be mentioned in the brochure of the company. This can be attached on a big board in the office or a simple menu can also be made.

Further, they can use this tactically as a checklist for training employees. The decision to add certain costs would be taken by the senior management of the company.

Statement of Cost of Goods sold

Hair salon

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (supplies)X 
-Purchases returnsX 
+ Direct labor (salary, commissions)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of services rendered/ COGS XX

Cost of goods sold for financial services

What are financial services?

Financial services are the economic services provided by the finance industry, that includes varieties of businesses to manage money, including credit unions, banks, credit-card companies, accountancy companies, consumer-finance companies, stock brokerages, insurance services, investment funds. The commercial bank is the simplest and most popular financial services structure available.

The commercial bank lends money directly to the business, helps to raise money from other firms in the form of debt or equity. The primary operations of commercial banks include:

  • Lending money in the form of personal loans, commercial loans and mortgage loans that includes property loans.
  • Issuing credit cards and processing of credit card transactions.
  • Issuing debit cards and maintenance of ATM related transactions.
  • Provide the services of remittance.

Financial services provide services by putting the money of its customers into productive use. Financial services provide services to its customers at large. Hence, cost of services needs to be computed instead of cost of goods sold. Financial services company provides services in the form of providing loans, accepting deposits and other auxiliary services.

Cost of services rendered for Financial services company

Financial services organizations provide services or products and are rarely involved in selling of goods. Hence, cost of services rendered would be equivalent for COGS for such companies. Since, there are various forms in financial services-based companies, we would look into commercial banks for example to look at the costs. The various costs in commercial banks are as follows:

Interest expenses

This item generally includes interest paid on liabilities; fee expenses related to borrowing operations and may include in some cases the difference between the issue price on debt

instruments and their par value. This is also called cost of borrowings for banks and financial institutions. The banks therefore try to reduce interest expenses as much as possible by creating deposits as much as possible.

Employee costs

This would include the cost of all the working employees and staff on payroll. Various statutory obligations such as provident fees also have to be paid on the salary of employees. These include Annual salary, national insurance, pension contributions, employer contributions for NI and pension, any other contractual payments included in the employee contract.

Few upper rated commercial banks pay administrators and clerical staff as well as accounting and human resources personnel. They tally up the cost of any benefits you provide to these staff members, such as healthcare and dental insurance, vacation and sick time, contributions you make to retirement programs and training, to get the complete picture.

Fees and commissions payable

The commercial banks hire intermediary organizations to sell their insurance products and others. The merchant commission is also paid sometimes on credit card transactions. Bank commission includes a fee a bank charges for a service, like withdrawing cash from an ATM that does not belong to your bank or transferring money to someone.

Statement of Cost of Goods sold

          Commercial Banks

ParticularsAmount ($)Amount ($)
Interest feesX 
Office SuppliesX 
Employees costX 
Fees and commissionX 
Cost of services rendered XX

Cost of goods sold for e-commerce

The business model of e-commerce

The business that is done with the help of the internet is called e-commerce. Ecommerce is everything in business and involves buying, selling, and making transactions online. The “e” in “eCommerce” is just like the “e” in “email and this means commerce done in electronic platforms such as software applications or websites.

E-commerce transactions are performed through specialized websites that can take payment for products. The customers buy and sell products online and everything here is geared around transactions.

In an offline store, the customer simply takes their new jeans to the checkout, hand over some cash, and leave the store with a purchase in a bag. This is how a transaction is done in an offline store. It works in a similar way if a customer is buying online, but there’s one important difference. In e-commerce business transactions, the customer never actually gets to handle the goods until they arrive at their home sometime later.

Cost of goods sold by e-commerce

The cost of goods sold is an accounting principle where the cost of a product has to be matched with the sale of that product. This gives an accurate picture of true revenues, gross margins, and profitability. When accounting for COGS is done, it gives a better idea to manage inventory on assets on books till the product is sold.

At the time of the sale, the cost of the product is deducted from the value of the asset and applied against the revenue from the sale to calculate your gross profit. The costs of goods sold include the cost of the product and may include all the costs of getting a product to market. Cost of goods sold could include:

  • Inventory storage fees and costs
  • Procurement costs
  • Listing fees
  • Production costs
  • Taxes and duties

The accountant shall handle all the product costs carefully if additional costs are being incurred to bring the product to market. Such costs include freight and duty.

Inclusion in COGS

To compute what’s included in COGS, the accountant shall deeply understand the meaning. COGS is the value of the goods or inventory. COGS and inventory value should include purchase price paid plus related ordering costs as handling fees to the warehouse.

Simply putting, it includes all the costs that the business incurs in order to get inventory in their hands. When inventory is sold, the cost of inventory shall be added to the cost of goods sold.

Exclusion from COGS

Ecommerce incur numerous costs like shipping to customers, payment processing fees, and traditional costs such as employee salaries, electricity bills, and rent for warehouse. The expenses reduce taxable income. However, the above costs are not included in the cost of goods sold because they do not relate to the cost of acquisition of the goods sold.

Statement of Cost of Goods sold

Ecommerce Company

ParticularsAmount ($)Amount ($)
Beginning inventory of suppliesX 
+ Purchases (supplies and freight inward)X 
-Purchases returnsX 
+ Direct labor (salary of staffs in inward works)X 
Cost of goods and services XX
-Ending inventory (X)
Cost of goods sold XX