What is an Incurred Cost?

An incurred cost is a cost arising from the consumption of an asset or service, or from a loss that has been sustained. Proper business planning requires management to have a detailed understanding of incurred costs in relation to revenues, in order to maintain an adequate level of profitability. Many companies compare their incurred costs to budgeted cost levels, to see if incurred costs are trending in accordance with expectations.

Examples of Incurred Costs

Here are several examples of incurred costs:

Rental cost. A business rents a forklift for its warehouse. This is an operating costs of running the materials management function, and is incurred in order to ensure that materials are properly positioned within the manufacturing and inventory storage areas.
Utility cost. A business uses water over the course of a month, but is not billed for its water usage until the end of the quarter. Under the accrual basis of accounting, the firm incurred the cost of the water when the water was consumed, so the firm should accrue this cost in its month-end financial statements.

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Cost Accounting Fundamentals

FAQs

How does an incurred cost differ from a paid cost?

An incurred cost is recognized when an obligation arises or resources are consumed, regardless of when payment is made. A paid cost is recognized when cash is disbursed, which may occur before or after the cost is incurred. Under accrual accounting, financial statements reflect incurred costs rather than paid costs.