What is an Incurred Cost?

An incurred cost is a cost arising from the consumption of an asset or service, or from a loss that has been sustained. Proper business planning requires management to have a detailed understanding of incurred costs in relation to revenues, in order to maintain an adequate level of profitability. Many companies compare their incurred costs to budgeted cost levels, to see if incurred costs are trending in accordance with expectations.

Example of an Incurred Cost

A business uses water over the course of a month, but is not billed for its water usage until the end of the quarter. Under the accrual basis of accounting, the firm incurred the cost of the water when the water was consumed, so the firm should accrue this cost in its month-end financial statements.