Common Cost
Definition: A cost incurred to support multiple cost objects that cannot be traced to any of them individually.
Relationship to Indirect Costs
Common cost is a label for indirect costs when viewing granular cost objects.
| Cost | Direct to… | Indirect (Common) to… |
|---|---|---|
| Factory manager salary | Manufacturing division | Individual beer varieties |
| Department head salary | The department | Individual products made there |
| Corporate headquarters | The company | Business units |
The Causation Test
A common cost is not caused by any single cost object—it’s caused by supporting the group.
The factory manager’s salary exists because the factory exists, not because Premium Dry beer exists.
Allocation Challenge
Common costs must be allocated (not traced) to cost objects. This introduces subjectivity:
| Allocation Base | What It Assumes |
|---|---|
| Direct labor hours | Products using more labor should bear more overhead |
| Machine hours | Products using more equipment should bear more cost |
| Revenue | Higher-revenue products should bear more cost |
Different bases → different product costs → different decisions.
When Common Costs Matter
| Context | Relevance |
|---|---|
| Product pricing | Need full cost including allocated common costs |
| Segment profitability | Common costs may obscure true performance |
| Make or buy decisions | Often irrelevant (won’t change with decision) |
| Cost reduction | Can’t reduce by dropping one product |
Common Trap
Thinking you can eliminate common costs by dropping a product. If the factory manager supports 5 products and you drop 1, the salary doesn’t decrease—it just gets spread over 4 products.
North: Where this comes from
- Direct vs Indirect Costs (common costs are a type of indirect cost)
- Cost Object (common costs support multiple cost objects)
East: What opposes this?
- Direct Costs (traceable to specific cost object)
- Avoidable Costs (disappear if activity stops)
South: Where this leads
- Overhead Allocation (how to assign common costs)
- Activity-Based Costing (more refined allocation)
- Segment Margin Analysis (separating traceable from common)
West: What’s similar?
- Joint Costs (one process, multiple outputs)
- Shared Services (corporate functions supporting multiple units)