Long Run Incremental Cost - LRIC

You just had a baby. Now, you’re paying for diapers and food and not much else. (Grandparents are buying more than enough toys and clothes.)

However, as the baby grows, new costs are going to come into play. School costs, fees for piano and tennis lessons, etc. And as the kid gets less cute, the grandparents will pick up fewer of the clothes and entertain bills. Plus, you eventually have to deal with college tuition and, uh...maybe some bail money along the way.

These costs are still off in the future. But you can predict them, if just in a general way.

Basically, that situation represents the same concept as long-run incremental cost. Businesses estimate the (mostly) predictable costs that a project will require as it moves forward in time.

Right now, your app design business just takes place in your basement, with you leaching off your parents’ WiFi. But as it grows, you’ll need office space, server capacity, new employees...all costs you can at least chart in a spreadsheet while your mom serves you a PBJ with the crusts cut off. You can lay out the long run incremental costs of your business.

Related or Semi-related Video

Cost Accounting: What is a Cost Driver?4 Views

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and finance Allah shmoop What is a cost driver Old

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All right people to be ableto fix something you need

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to know what's wrong with it first right That's the

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point of a cost driver I'LL think about an actual

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driver You're on the highway and suddenly you hear a

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loud crunch from underneath the car The car skids to

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a halt smoke pouring out from under the hood Yeah

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well engines air complicated things The mechanic has to be

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able to identify what specific part broke so he can

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fix it Otherwise every time you hear a rattle well

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you have to ditch the entire engine and start over

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Well the term cost driver can get used a couple

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of different ways In one sense it refers to any

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expense that contributes to the production of a company's product

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Will cost drivers in this context or used to identify

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specific items in a production process that contribute to the

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expense of making that item Cost driver also gets used

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to refer to the main expenses a product or at

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least a handful of expenses that matter most well The

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goal is to identify the most significant contributors to the

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overall cost You own a cow candy bar factory to

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make the bars you've incurred a series of expenses Well

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there are the ingredients you know like a cow which

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makes chocolate You got sugar and milk and nuts and

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caramel You've also got the labor like the people actually

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working the industrial mixing vat or driving stuff around on

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forklifts And you've got things like kill the energy needed

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to run all the machinery and heat up all the

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sugar and chocolate and stuff and the cost of cleaning

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all the mixing equipment After your employees lick the excess

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you know gooey stuff off the mixing bowl thing Well

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each item the chocolate to sugar the nuts the labor

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the energy the cleaning all count as cost drivers They're

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all drivers of the cost of making a candy bar

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But you Khun drill down further to find the expenses

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that really matter Like say that the sugar in that

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candy bar makes up forty percent of the cost of

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producing that candy bar Well that makes it the main

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cost driver for that product That candy bar Well the

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cost of the chocolate might go up but it doesn't

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really matter because well that Takao is only five percent

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of the total cost of that candy bar But if

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the cost of sugar goes up well that could really

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hurt the bottom line Well individual cost drivers can include

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many distinct categories of expenses Labor utilities transportation insurance raw

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materials advertising interest expenses complimentary raw oyster bar for the

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break room Any of these things can become cost drivers

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Well you Khun further categorise these cost drivers into what

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are called cost pool's think animals Cost drivers are like

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individual species Draft for Angela's and hammerhead sharks Cost pools

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are like the broader animal classes like mammals a racket

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IDs and fish So electricity water an Internet costs or

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connectivity costs are each potential cost drivers But you can

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also group them together in cost fools of utilities Identifying

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cost drivers allows companies to find ways to maximize profitability

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well back to the candy bar Since sugar makes up

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forty percent of the cost of these candy bars well

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if you can lower the cost of that sugar you

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could really increase profits You could change your recipe maybe

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to use less sugar and more chocolate which would lower

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your dependence on sugar Or you can replace sugar with

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a substitute like a sweetener You know one of your

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scientists cooked up in a lab if that sweetener is

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cheaper than sugar well maybe you've just significantly lowered your

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expenses but you only know to focus on lowering sugar

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costs because you did the work to find out that

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sugar was in fact your primary costs driver Will companies

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track expenses as closely as possible to give category separate

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in order to make these determinations like say you discover

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that the chocolate your employees have been licking off the

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equipment really leads to a big drop in inventory So

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you put in place a zero licking policy enforced by

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electrodes in the equipment They give a little discouraging shock

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when they come into contact with the human tongue Electrocution 00:03:56.56 --> [endTime] or no chocolate life is full of tough decisions

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