Historical costs are those costs that have been incurred over time in a manufacturing or service provision process.
These costs are obtained either at the end of the economic period or at the end of several manufacturing cycles that make up a single period. In this case we refer to ‘period’ as one year.
Advantages and disadvantages of historical costs
Its main advantage is to record costs one period after another to carry out retrospective analysis, with which it will be possible to study whether the volume, efficiency and costs involved have evolved positively or negatively.
With this in mind, objectives or goals can be established objectively based on past statistics, so it will be easier to know at what times of the year or in the manufacturing process more liquidity, raw materials or labor will be required.
The only notable disadvantage in the use of historical cost information is that the analysis must be very well explained and detailed, since key aspects such as the evolution of the value of the currency (inflation, deflation or stagflation) must be taken into account. and the economic and social situation of that period (moments of crisis, expansion or stagnation).
Historical costs example
To better understand the concept, several examples of historical costs will be presented:
- Water and electricity supplies used during the plastic boat manufacturing process over a year.
- Workforce dedicated to manufacturing automobiles on an assembly line for an entire year.
- Gasoline used by a taxi driver for one year.
- Allowances paid to an executive of a company for one year for trips abroad.
- Commissions generated by a pool of employees when providing professional services on behalf of the company for one year.
It should be noted that although the year has been used as the main unit of measurement, it is also possible to adapt the historical costs to semesters, quarters or any other unit of measurement. This type of change may mean that it is more useful when analyzing the activity of the company.