What is Imputed or Notional Cost?
Imputed Costs are hypothetical notional costs which is not recorded in the books of accounts or which is not paid in cash or kind. This costs also refer as implicit costs or hidden costs which is not needed to report on the financial statement of the company as a separate costs. Imputed Costs also known as Notional Cost, hypothetical overhead which is also considered as opportunity costs.
Examples of Imputed Costs:
Some examples of imputed costs are presented as follows:
- Interest on own Capital : Owners bring capital to the business concern but they never claim interest for this loan. If the company borrowed the loan from the outside, they have to pay interest on this capital. Though this interest amount is not paid, the management should consider this interest amount for the performance measurement. This is not affected on the financial statement.
- Rent of own building : Company may use its own building for which rent is not required to pay.
- Salary of owner: The owner of the company give huge time in its business for which he is not paid. But this amount should be taken into consideration for the performance measurement.
What is Out of Pocket Cost?
When the payment for an element is not required to be made to a third party (as for example, depreciation) and is excluded from the total cost, the cost is called as out of pocket cost. This is important for the purpose of price fixation during trade depression, for taking ” make or buy” decision etc.
What is Differential or incremental cost?
Differential Costs or Incremental costs refers the difference of cost between two alternatives or cost for the additional production. Incremental cost is very significant to the management for taking their decision whether the proposed project will be taken or not.When a change is made in the level of output i.e increasing the level of production, the incremental cost is raised.It is important to ascertain incremental cost in order to judge the desirability of effecting the change from the point of view of cost, revenue and profit.
Example of Incremental Costs:
Suppose, XYZ Ltd is doing well with its existing product XOXO Shoes. Its demand is very high. Considering this high demand XYZ Ltd intends to increase its production capacity from 80,000 units to 100,000 units. Total Production Costs for 80,000 units is $450,000 and for the proposed 100,000 units production the production costs would be $ 550,000.
Here, Total Incremental unit is (100,000-80,000) Units = 20,000 units
Total incremental costs is (550,000-450,000) = $ 100,000
Incremental cost per unit is (100,000/20000 units ) = $ 5 Per unit