Definition:
Traceable Fixed Costs can be defined as fixed costs that can be specifically attributed to a particular segment in the business. During the normal course of the business, it can be seen that numerous different costs are associated with a company. Hence, it is important to identify which costs are associated with which specific departments within the company.
On the other hand, traceable fixed costs 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 in ensuring that companies can identify areas within the company that incur higher fixed costs.
For example, certain fixed costs are specific to certain functions or certain lines of operations within a business. It becomes imperative to consider these costs 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. If there is a dip in the profitability of the company, the company’s decision-makers are likely to close down that particular unit.
However, to find out which particular unit is not performing well, there needs to be a proper cost-benefit analysis, which will help companies 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 the company can effectively work to reduce those costs or spread them over a larger number of operations 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 Ethiopia, 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 the treatment of depreciation. 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 will be regarded as a traceable fixed cost. On the other hand, if the machinery is commonly used in the business, it would be treated as a common fixed cost.
Even though depreciation in itself is a traceable fixed cost, since it can be attributed to specific machines, it can be seen that it is only treated as a traceable cost if the utility of that particular machinery is shared between different machines projects within the company.
