Definition: Business function costs are the total sum of all expenses both fixed and variable for a specific step in the value chain. In other words, it’s the total cost associated with each step a product takes from the manufacturer to the consumer.
What Does Business Function Cost Mean?
In managerial accounting, manufacturers’ activities are separately accounted for based on their function. Each function represents a different activity or step in the value chain that adds usefulness to products before they are sold to customers.
Some examples of functions typically include manufacturing, marketing, retailing, or other distribution costs. You can almost think of each of these functions as different departments of the company. Each works separately to add value to the product before it is delivered to the customer.
Managerial accountants add all of the business function costs together to arrive at the full cost of the product. This cost includes all of the expenses incurred to create the product, market it, and eventually sell it to customers.
Function costs are usually used in absorption costing systems where both fixed and variable costs are included in inventory and cost of goods sold at the end of the year. This approach matches the expenses with the revenues because the costs aren’t expensed on the income statement until the revenues are recognized.