Instructions for main post (Around 200 words)
Please, write a main discussion post about the below topic:
Topic: "It is not important for a company to distinguish between cost incu
ence and locked-in costs." Do you agree? Explain with the use of appropriate examples.
(Citations only needed for main post)
Instructions for the two classmate responses (around 150 words each)
Please, respond to the below two classmate main posts. (Please, the responses need to be a discussion, not an evaluation. You can agree with them and add/comment about their response.)
Thank you
Classmate post #1:
Cheyenne Haley
Distinguishing between costs is important to managers because it is more useful and helps a company at reducing costs. Cost-incu
ence is when a resource is consumed to meet a specific objective (Datar & Rajan, XXXXXXXXXXCost-incu
ence costs describe when costs are sacrificed. An example would be manufacturing operating using a large amount of electricity during a month like January. The company will incur the cost in January and record it as an expense. With cost incu
ence, the company will need to report a cu
ent liability for the amount owed to the utility for electricity it used during the month. This may require an accrual adjusting entry with an estimated amount. Cost incu
ence is reflected by a debit to an asset account, a defe
ed account (Sharma, n.d.). Locked-in costs are costs that have not yet been incu
ed but will be incu
ed in the future based on decisions that have previously been made. Teams need to focus on design decisions before costs are locked in to reduce the time it takes to do a task, eliminate waste, and improve operating efficiency and productivity. To do this, one must understand customer requirements, value-added, and nonvalue-added costs, need to anticipate how costs are locked in before they become incu
ed and use cross-functional teams to redesign products and processes to reduce costs while meeting customer needs. Locked-in costs are those payments in which the company cannot reverse, at least not before a certain period of time. An example would be the payment to employ labors, investing money, or bank loans. The investment becomes locked in until the time of sales or in the manufacturing stage. I think that it is important to distinguish between cost incu
ences and locked-in costs because it is difficult to reduce costs if the costs have already been locked in. if the company distinguishes between the two kinds of costs, it can potentially help the company reduce its costs and increase in margins. It can also help create more demand for the products, economies of large-scale production, more employment through industrialization and an all-round improvement in the standard of living. The company’s profit is increased through reduced costs as well, which can also provide a basis for more dividends to the shareholders.
Classmate post # 2:
Kari Grippo
I do not completely agree with the statement that it is not important for a company to distinguish between cost incu
ence and locked-in costs. According to the text, cost incu
ence describes “when a resource is consumed (or benefit forgone) to meet a specific objective” while locked-in costs are costs which “have not yet been incu
ed but will be incu
ed in the future based on decisions that have already been made” (Datar & Rajan 2019, p.261). The majority of costing systems measure cost incu
ence while also identifying locked-in costs. An example of cost incu
ence might include a retailer such as Kohl’s who begins their operations of December 1 and their electric meter is read by the utility of the last day of each month. In this example, during the month of December Kohl’s will have incu
ed the cost of the electricity it used during December. In regards to locked-in costs, if Kohl’s were to decide to build a new factory in Florida, the costs of doing so would be “locked-in” as the decision to build the new factory has already been made and these costs will actually be incu
ed at a later date. Depending on the type of business processes in place, management may choose which costs they wish to recognize as locked-in versus which they choose to recognize initially as cost incu
ence. For example, Apple may recognize the direct material costs of the MacBook Pro only when it is assembled and sold. In this case, however Apple’s direct material cost per unit is locked-in earlier when the Apple technician and designers specify the components utilized to develop the MacBook Pro.
Cost incu
ence and cost recognition are different from one another. Cost incu
ence usually precedes cost recognition which is why locked-in costs should be distinguished from cost incu
ence, especially when analyzing the financials at any given point in time and not just at year-end. When the benefits associated with cost (the goods or services received by the exchange) extends into the next year, cost incu
ence will be reflected by a debit to an asset account, as a defe
ed cost (Sharma, XXXXXXXXXXCost recognition will then be effected subsequently in the following year via the entry that is made debiting an expense (or loss) and crediting the defe
ed-cost asset (or contra-asset) in total or partially. In instances where the beneficial life of the incu
ed cost is short (i.e. not beyond the present year), both cost incu
ence and cost recognition will be reflected concu
ently in the cu
ent year and a debit to expense instead of asset is made and no entry will be needed in the next year (Sharma, XXXXXXXXXXThe relationship between cost incu
ence and locked-in costs is causal as locked-in costs will eventually be incu
ed. It is important to distinguish between cost incu
ence and locked-in costs, however, because most costs are usually incu
ed during the manufacturing stage and have already become locked-in at the planning and design stage- which makes it difficult to reduce or change costs since they have already been “locked in.”