What is a Common Cost?

A common cost is a cost that is not attributable to a specific cost object, such as a product or process. When a common cost is associated with the manufacturing process, it is included in factory overhead and allocated to the units produced. When a common cost is associated with administrative functions, it is charged to expense as incurred. This means that common costs associated with production may be capitalized into inventory and carried forward for several reporting periods, while common costs associated with administration are charged straight to expense.

Types of Common Costs

Here are several general types of common costs:

Facility rent. The cost of rent for a production facility is not directly associated with any single unit of production that is manufactured within that facility, and so is considered a common cost.
Administrative support. The services provided by the human resources department are apportioned among any departments that have employees, so the department’s overall cost is considered a common cost.
Legal fees. A business will likely incur a variety of legal fees over time, perhaps relating to potential lawsuits or how to deal with a looming union negotiation. These fees are not attributable to any cost object, and so are considered a common cost.

Related AccountingTools Courses

Cost Accounting Fundamentals

Cost Management Guidebook

Example of a Common Cost

An example of a common cost is the salary of a factory supervisor who oversees multiple product lines. This expense supports overall operations but cannot be directly traced to a specific product, making it a shared or indirect cost. Thus, in a furniture manufacturing company producing chairs, tables, and cabinets, the supervisor’s salary benefits all three product lines equally. Since the cost is incurred regardless of which product is being made, it must be allocated across the products using an appropriate method, such as based on labor hours or machine time used.