Recurring, Nonrecurring, Fixed, and Variable Costs

Cost data should be separated into recurring and nonrecurring costs because one-time nonrecurring costs will skew the costs for recurring production units.

Nonrecurring Costs

Nonrecurring costs only occur once. These include development and investment costs that generally occur only once in a system’s life cycle. They include all the effort required to develop and qualify an item, such as defining its requirements and its allocation, design, analysis, development, qualification, and verification. Costs for the following are generally nonrecurring:

  • manufacturing and testing development units, both breadboard and engineering, for hardware, as well as qualification and life-test units;

  • retrofitting and refurbishing development hardware for requalification;

  • developing and testing software before beginning routine system operation; nonrecurring integration and test efforts usually end when qualification tests are complete;

  • providing services and some hardware, such as engineering, before and during critical design review; and

  • developing, acquiring, producing, and checking all tooling, ground handling, software, and support equipment and test equipment.

Recurring Costs

Recurring costs occur periodically as items are produced or services are performed. For example, the costs associated with producing hardware—that is, manufacturing and testing, providing engineering support for production, and supporting that hardware with spare units or parts—are recurring costs. Recurring integration and testing, including the integration and acceptance testing of production units at all WBS levels, also represent recurring costs. In addition, refurbishing hardware for operational or spare units is a recurring cost, as is maintaining test equipment and production support software.

An important reason for differentiating recurring from nonrecurring costs is because of their application to learning curves. Cost improvement, or learning, is generally associated with repetitive actions or processes, such as those directly tied to producing an item again and again. Therefore, learning curve theory applies only to recurring costs. Appendix VII provides more information on learning curves.

Costs can also be categorized as fixed or variable. Fixed costs are static, regardless of the number of quantities to be produced. An example of a fixed cost is the cost to rent a facility. A variable cost is directly affected by the number of units produced and includes such things as the cost of electricity or overtime pay. Knowing what the data represent is important for understanding anomalies that can occur as the result of production unit cuts.