January 26, 2022

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Future Costs meaning and Key Explanations

Future Costs meaning and Key Explanations
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Future costs are those costs expected to be incurred in another accounting period. These costs are usually determined by management using probability, inflation, exchange rate, or expert review. Whatever method is used, it is important to plan for the future. Individuals also use future costs when budgeting expenses. In this article, let’s explain this term.

Definition of Future Costs

1. Future costs are a type of cost that involves estimating expenses an individual or business will incur in a particular period, mostly one year.
2. It can be defined as a cost estimated and expected to be incurred in the future.
3. Also, it is the cost forecasted and which the entity’s top management expects to incur in the next accounting period.

Key Explanations

Estimates. Future costs are estimates. They may be different from the actual amount spent. The individuals or management of the entity estimates these costs based on intuition (based on experience), current market price, or by asking an expert. Assuming a business wants to buy a Solar Power system for the 2022 financial year. It can decide the future price by estimating the price based on what they think, the price it is sold in the market, or by asking a professional. Normally, the highest price is chosen for the estimate.

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Forecast. Another way to determine future costs is by forecasting. This uses probability, inflation rate, or foreign exchange rate to decide the expenditure to be incurred. The inflation rate may be added to current costs to get the incremental cost for each item of expenses the company will incur in the coming year. Probability may also be used. If the company imports or exports its products and raw materials, exchange rates will be used to determine future costs.

Individuals and management decisions. This type of expenses aid individuals and management decisions. This is done through personal budgeting and corporate budgeting. An individual may budget every month how he or she will spend his or her income. In doing so, the individual will decide the future cost of each item needed for the month. Organizations’ management does the same.

However, companies use this term in broader cases. Such as predicting future cash flow from a project or capital expenditure (such as buying new machinery).

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Relevant costs are a subset of future costs. Expenses are relevant if and only if it is necessary for decision-making. And it is the future costs that are relevant in making decisions. You can learn more about relevant costs here.

Conclusion

Future costs are expected to be incurred in a business. This is done through forecasts and estimates. Such expenses or expenditures are necessary for management and individuals to make decisions and to know future cash flow.

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