Imputed costs

In business administration and accounting, the term “imputed costs” is understood to mean types of costs that are not offset by any or the same amount of effort.

Definition / explanation

Imputed costs are costs that must be taken into account in a company's price calculation without these costs being offset by actual expenditure. Even if costs are offset by an expense of a different amount, one speaks of imputed costs.

Kalkulatorische Kosten sind unter anderem kalkulatorische Zinsen und der kalkulatorische Entrepreneur wages. Auch Mieten und Abschreibungen können kalkulatorische Kosten sein.

Types of Imputed Costs

Behind the construct of imputed costs is the assumption that the costs that are not offset by an actual payment must be included in the price calculation for a product.

Imputed interest - While interest on borrowed capital flows directly into the product price through the interest payments, there are no direct interest payments when using equity. Nevertheless, it makes sense to include the theoretical interest generated by the equity in the calculation. The standard market interest rate is usually the benchmark for imputed interest.

imputed entrepreneur's wage - The same applies to the imputed entrepreneur's wages. Because unlike wages and salaries of employees, the wages of the managing partners of partnerships or sole proprietorships are not included in the calculation through the monthly transfer of the wages. Nevertheless, the entrepreneur must receive a wage for his livelihood, the amount of which should be based on the wages of the executive employees.

calculative rent - When using your own buildings and rooms, an imputed rent is taken into account, which in turn should be based on market rental prices.

Imputed depreciation - The wear and tear and depreciation of machines, computers and vehicles also do not have a direct impact through payment movements. Nevertheless, wear and tear and loss of value result in costs that should be taken into account in the calculation. In particular, tax depreciation is a widespread form of representing this type of cost.

imputed risks - If business operations are associated with risks, these risks must be taken into account in cost accounting - one speaks of imputed risk costs. They cover the costs caused by theft, accidents, falling prices and other unforeseeable events but are not covered by insurance.

Why do imputed costs have to be taken into account?

Imputed costs are an important part of a company's cost accounting. At the same time, these fictitious costs help with important company decisions.

If the imputed interest on equity is permanently lower than the interest that equity can generate on the financial market, the question must be asked whether the business model is worthwhile.

In many cities, this connection can be observed in the real estate market and the imputed rents: If the imputed rent for one's own business premises falls permanently below the local rent, it makes economic sense to give up your own business and rent the business premises to third parties at the market interest rate .

In the case of entrepreneurial wages, it is also evident that a low entrepreneurial wage makes it unattractive to continue doing business.

Summary

  • Imputed costs are not offset by actual costs or payment transactions
  • Imputed costs are: interest on equity, rent for your own business premises, entrepreneur wages and depreciation
  • A correct price can only be determined if the imputed costs are taken into account
  • Market prices for interest, rents and salaries form the basis for the imputed costs
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