What Is Aggregate Cost? Definition And Related Terms
Updated 28 September 2022
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The aggregate cost is a term that refers to the total cost of developing a product or a project for a company. Professionals involved in the marketing and planning process can benefit from learning about the types of aggregates used in businesses. Understanding the basic cost aggregation terms can be a valuable skill while launching a new product or planning a project. In this article, we define aggregate cost and discuss other important terms related to it.
What Is The Aggregate Cost?
Aggregate cost is the total amount of money required to create products, plan projects or provide services. Professionals involved in a project management plan can divide the entire project into various phases. This may allow them to measure the total amount of money required to carry out each phase of the project. The cost of aggregation may take into account several factors such as variable and fixed costs. Variable costs are the costs required in a project that may increase or decrease depending on the requirements to develop that particular project.
It may change depending on the change in production volume or the number of features that a project or product offers. Raw materials like resin that we use in production or a product can be an example of variable costs. Other examples can be labour costs, utility expenses, production supplies, sales commissions and freight costs. Fixed costs are costs that may remain unaffected by external forces essential for the total production activity. Some common examples of fixed costs are interest payments, salary payables, rent or lease payments, taxes on property or insurance payments.
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Difference Between Fixed And Variable Costs
Companies can benefit from understanding how these two types of costs differ from each other. Learning about these differences can help you know how the volume of production impacts them. In addition, you can also use this information to determine how you should price your products. Here are some common differences between fixed and variable costs that can help you understand this topic better:
Nature of the expense
Fixed costs can be related to time. This means they may remain constant for a period of time. Companies can develop budgets for those set expenses as they can be due at set intervals. Variable costs are quantity-related. They may change in proportion to output.
Related: What Is The Full Form Of GDP? (Definition And Calculation)
Impact by production
Fixed costs may remain constant and can be independent of the level of output by the company. On the contrary, variable costs may change in direct proportion to the changes in business activity level. Companies often cover the expense of fixed costs regardless of any business activity. A decrease in production may cause a lowering of variable costs.
Related: How To Calculate Variable Cost In 3 Steps (With Examples)
Uses Of Cost Aggregation
Cost aggregation is helpful in studying and analysing the return on investment (ROI) of a marketing campaign. Here are other common uses of cost aggregation:
Defeats fragmented cost data
Helps project managers to view marketing expenditure at every step
Provides project managers with an accurate picture of ROI
Helps in strengthening the negotiating power with vendors and insurers
Helps in introducing new payment models
Allows you to view costs based on partner, locations and platforms
Related: What Is Cost Of Production? (With Factors That Affect It)
What Is The Aggregate Rate?
The aggregate rate allows you to formulate the interest rate in the best possible way. Aggregate rate functions and acts as a benchmark for different terms such as aggregate expense rate, aggregate outstanding loan balance or aggregate advance rate. As most interest rates are compound, aggregate interest rates can be above the annual interest rates. Many consumers who use credit cards or take out loans are responsible for paying aggregate interest rates.
Related: What Is A Cost Accountant? (With Duties, Salary And Skills)
What Is The Aggregate Percentage?
The aggregate percentage is the percentage that you obtain by dividing the total amount or numbers achieved by the maximum number or amount that can be achievable. One use of aggregate percentages is in providing final grades to students in school settings. Here is a good example that can help you understand aggregate percentages:
Example: A student studying in an engineering college wants to calculate his aggregate percentage. For calculating aggregate percentage, he requires to divide his total marks obtained in all semesters by the overall total marks of semesters. He scored 130 out of 200 in Maths, 140 out of 200 in Physics and 160 out of 200 in Chemistry. The first step towards calculating the aggregate percentage is calculating the total marks he obtained in all three subjects, which is 130+140+160=430.
In the second step, we can calculate the maximum marks that he can obtain in all three subjects, which is 200+200+200=600.
In the last step, we divide the marks obtained by the total marks and multiply by 100.
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What Is Aggregate Income?
Aggregate income is the total amount of income that suppliers of the production factors receive in a specific period of time. This amount is the sum total of all the income without factoring in taxation, inflations or double counting. Here are the variables that you can consider while calculating aggregate income:
Employee income: It is the combined income of all employees before accounting taxes.
Rental income: Individuals who own real estate rent out their property and the income they generate from this refers to rental income.
Interest income: Investments and saving accounts can provide a source of income referred to as interest income.
Subsidies or government revenues: Individuals who own businesses or earn income on their investments can get income from the government in the form of subsidies.
Government income: It is the amount of money that the government earns in an economy.
Business owner income: Many companies generate this money from their respective field of business.
Corporate income: In the economy, corporations make a significant amount of money referred to as corporate income.
Here is the formula for calculating aggregate income:
Aggregate income = Employee compensation + Rental income + Interest income + Business profit + Government subsidies
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What Is The Aggregate Level Cost Method?
The aggregate level cost method is an actuarial accounting method that helps in calculating the overall benefit and cost of a pension plan for all employees. This method allows you to calculate the total payroll of an entire group of employees rather than a single one. The total payroll gets calculated in the form of a percentage.
The aggregate level cost method is also an accounting method that focuses on matching and allocating the benefits and costs of a pension plan over the duration of the plan's life. While calculating this accounting professionals may use percentages that change depending on any yearly losses or gains.
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How Does The Aggregate Level Cost Method Work?
The aggregate level cost method focuses on the entire group and calculates the plan as a percentage of the yearly payroll. In cases of fluctuations in actuarial cost, the percentage gets adjusted on a yearly basis. One of the most significant benefits of using the aggregate actuarial cost method over other methods is that it helps in minimising many challenges and limitations that you may face when using an individual-level cost method.
Here are some important steps involved in using the aggregate actuarial cost method to calculate the benefits and the cost of the pension plan:
Calculating the total amount, time of payment and total cost of the pension plan
Considering the benefits which the pension plan offers
Making adjustments to the cash flows
Finding liabilities that require amortisation.
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