Treatment of common costs

What is a common cost?

An operational expense for a facility, item, or market sector that is split by two or more departments or users is referred to as a common cost. In other words, it's a cost that must be divided across all departments or users in order to produce a good or deliver a service. According to the cost object, common expenses must be distributed evenly to all users who share the expenditure. Due to the fact that the shared expenses are far less than the overall cost of the activity if each department were compelled to cover it separately, this method is significantly better for all concerned departments.

Let's examine a case in point. The CEO of a tiny product firm in Seattle named William must travel to two distinct suppliers for each of the two products his business manufactures. The first is in Canada, while the second is in Germany. Compared to the $500 flight to Canada, the airline ticket to Germany costs $2,000. William may get his prices down to $2,000 by purchasing a single ticket that includes a stopover in Canada, saving his firm $500 on the entire trip.

View here on deduction under section 80g.

Common expenses related to the tonnage tax business should be established on a fair basis if a tonnage tax company also engages in any activities or businesses other than the tonnage tax business. When a tonnage tax company uses an asset, which is not a qualifying ship, for purposes other than the tonnage tax business, the Assessing Officer should provide depreciation on such asset between the tonnage tax business and the other business in a reasonable manner, taking into account the utilisation of such asset for the tonnage tax business and the other businesses.

In order for the business to precisely calculate the cost of each activity and change pricing accordingly, common costs are often assigned or allocated to shared goods, processes, and activities. In this instance, visits to various suppliers with connections to various departments constitute the combined activity.

Certain processes could be viewed as common expenses by some businesses. For instance, separate departments may split costs for customer relationship management (CRM) software that both groups utilise. Groups may profit from these procedures and services in different ways, but by splitting the expenditures, they may cut back on departmental costs and get access to equipment that will help with their procedures.

Administrative charges like rent or energy might be another source of regular expenses. Although the expenditures themselves don't belong to a particular organisation or service, paying these charges benefits several departments. Instead, they may be advantageous to the whole organisation and help make everyone's actions successful.

Relevant matter on 80g.