What are Traceable and Common Fixed Costs? Definition and Explaination

All the overhead expenses that are occurred in the head office, in order to manage these locations remotely. 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. Can undertake drastic changes if the business operating in the overseas market is more demanding than business operations in the domestic market.

The company has two major divisions–social media games and cell phone games. Each division can be further segmented into product lines. For example, the social media games division consists of two major project lines–role playing games and puzzle games. Depending on the complexity of the company’s traceable fixed costs structure, a traceable fixed expense for one segment of the business may be a common fixed expense for another. Rent for the clothing warehouse is a traceable fixed expense on the clothing department’s statement, but the rent is a common fixed expense on the hat and shirt departments’ statements.

Management

Two concepts are used in assigning and classifying expenses. First, each center is charged only with those costs directly traceable to the center. Second, costs charged to the center are subdivided between the categories of variable costs and fixed costs. Subtracting variable costs from revenue indicates the center’s contribution margin; subtracting traceable fixed costs indicates the responsibility margin. The most puzzling aspect of segmented income statements is probably the treatment of fixed costs.

• The variable costing formula evaluates the direct cost and other variable manufacturing expenses incurred on each product unit.
• Discontinuation of a segment will force the unavoidable expenses to be allocated to another product or segment line.
• There is often certain ambiguity regarding the treatment of depreciation.
• This classification permits arranging an income statement in a manner showing subtotals for contribution margin and total fixed costs – two key amounts in cost-volume-profit analysis.

Or, segment margin can be interpreted as the profitability of a particular segment before common fixed costs are incurred. Cost volume profit analysis can be applied to the whole organization and to particular segments within the organization. Cost volume profit analysis is covered in detail in chapter 4. Cost volume profit analysis requires a contribution margin format income statement. Cost volume profit analysis is used to make important decisions about selling prices, sales volume, unit variable costs, total fixed costs, and the mix of products sold. Like traceable fixed costs, common fixed costs affect management decisions.

The Definition of “Traceable Costs”

It is one of the two main types of costs incurred by businesses, the other being variable costs. Fixed costs are sometimes also referred to as overhead costs. They are considered to be part of the cost of production, along with variable costs, and are therefore used in the calculation of total cost. 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.

Fixed cost is a type of business expense that does not fluctuate with changes in production or sales volume. It is a cost that a company incurs regardless of whether it is doing business or not. The common fixed cost is the cost that a company spends to provide benefits to all branches, locations, and segments. It is not easy to spread the cost to each item. A fixed cost is a monetary amount that does not fluctuate with changes in the level of output or business activity.

Practice Video Problems

The contribution margin format is used to prepare segmented income statements. The contribution margin income statement classifies costs on the basis of cost behavior. Cost behavior is how a cost reacts to changes in production or sales quantity. Cost behavior is classified as variable, fixed or mixed.

Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making. Fixed costs are sunk costs and therefore irrelevant in decisions. Transfer prices are the dollar amounts used by the supplying and buying divisions within a company to record the exchange of a good or service. When an external market exists for the product or service, then most companies use the market price as the transfer price.

Segment Margin

For example, a company is planning to eliminate an entire product line, and wants to understand which expenses will be terminated when the product line is shut down. The costs traceable to the product line include advertising expenses, a marketing specialist, a production line, and a warehouse. All of these costs will be eliminated. The salary of receptionist at an office shared by a number of doctors is a common fixed cost of the doctors.

If the product line or segment is closed. Discontinuation of a segment will force the unavoidable expenses to be allocated to another product or segment line. Quick Check  How much of the common fixed cost of $200,000 can be avoided by eliminating the bar? A common fixed cost cannot be eliminated by dropping one of the segments. Hindrances to Proper Cost Assignment The ProblemsThe Problems Omission of some costs in the assignment process. Assignment of costs to segments that are really common costs of the entire organization.