Definition: Costs in an organization that are directly linked and proportional to the yield of a production process. In other words, costs of inputs that are variable in terms of cost behavior and can be measured in a dollar amount. These inputs are connected to a level of output that can be measured in some physical way.
What Does Engineered Costs Mean?
What is the definition of engineered costs? While many costs are associated with a production process in an organization, engineered costs are those that have a direct association to output. The cost relationships are easy to identify and measure relative to other types of costs. These costs are variable, meaning that they fluctuate proportionally to the level of production.
In order to tell if a cost is engineered, it is helpful to think about what the cost is tied to. If the cost is associated with overhead that does not directly vary with the number of units produced, then it is not en engineered cost. If it is the cost of a direct input of the product and producing more units would definitely requiring purchasing more of that input, then the cost is considered an engineered cost.
Let’s look at an example.
Christina is trying to categorize a list of costs for the plant at which she is the general manager. In order to determine which costs are directly linked to production outputs, she wants to note which costs are engineered costs. The costs are listed below:
- Direct labor
- Air conditioning
- General manager’s salary
- Direct materials
Marketing, air conditioning, and Christina’s salary are not considered engineered costs because they do not have a direct cost relationship to outputs. Direct labor and direct materials can be directly linked to output, and are therefore considered engineered costs.
Define Engineered Costs: An engineered cost means expenses associated with a production process.