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Transactions costs

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Definition of Transactions costs

Transactions Costs Image 1

Transactions costs

The time, effort, and money necessary, including such things as commission fees and the
cost of physically moving the asset from seller to buyer. Related: Round-trip transaction costs, Information
costs, search costs.



Related Terms:

Round-trip transactions costs

costs of completing a transaction, including commissions, market impact
costs, and taxes.


economic components model

Abrams’ model for calculating DLOM based on the interaction of discounts from four economic components.
This model consists of four components: the measure of the economic impact of the delay-to-sale, monopsony power to buyers, and incremental transactions costs to both buyers and sellers.


Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.


Agency costs

The incremental costs of having an agent make decisions for a principal.


Avoidable costs

costs that are identifiable with and able to be influenced by decisions made at the business
unit (e.g. division) level.



capitalization of costs

When a cost is recorded originally as an increase
to an asset account, it is said to be capitalized. This means that the outlay
is treated as a capital expenditure, which becomes part of the total
cost basis of the asset. The alternative is to record the cost as an expense
immediately in the period the cost is incurred. Capitalized costs refer
mainly to costs that are recorded in the long-term operating assets of a
business, such as buildings, machines, equipment, tools, and so on.


Carring costs

costs that increase with increases in the level of investment in current assets.


Transactions Costs Image 2

carrying costs

costs of maintaining current assets, including opportunity cost of capital.


Costs Capitalized in Stealth

A particularly egregious form of aggressive cost capitalization
where inappropriately capitalized costs are hidden within other unrelated account balances.


costs of financial distress

costs arising from bankruptcy or distorted business decisions before bankruptcy.


Direct costs

costs that are readily traceable to particular products or services.


Execution costs

The difference between the execution price of a security and the price that would have
existed in the absence of a trade, which can be further divided into market impact costs and market timing
costs.


Financial distress costs

Legal and administrative costs of liquidation or reorganization. Also includes
implied costs associated with impaired ability to do business (indirect costs).


Fixed costs

costs that do not change with increases or decreases in the volume of goods or services
produced, within the relevant range.


fixed costs

costs that do not depend on the level of output.


fixed expenses (costs)

Expenses or costs that remain the same in amount,
or fixed, over the short run and do not vary with changes in sales volume
or sales revenue or other measures of business activity. Over the
longer run, however, these costs increase or decrease as the business
grows or declines. Fixed operating costs provide capacity to carry on
operations and make sales. Fixed manufacturing overhead costs provide
production capacity. Fixed expenses are a key pivot point for the analysis
of profit behavior, especially for determining the breakeven point and for
analyzing strategies to improve profit performance.


Transactions Costs Image 3

Friction costs

costs, both implied and direct, associated with a transaction. Such costs include time, effort,
money, and associated tax effects of gathering information and making a transaction.


Funding Costs

The price of obtaining capital, either borrowed or equity, with intent to carry on business operations.



Going-private transactions

Publicly owned stock in a firm is replaced with complete equity ownership by a
private group. The shares are delisted from stock exchanges and can no longer be purchased in the open
markets.


Incremental costs and benefits

costs and benefits that would occur if a particular course of action were
taken compared to those that would occur if that course of action were not taken.


Indirect costs

costs that are necessary to produce a product/service but are not readily traceable to particular products or services – see overhead.


Information costs

Transaction costs that include the assessment of the investment merits of a financial asset.
Related: search costs.


Market impact costs

Also called price impact costs, the result of a bid/ask spread and a dealer's price concession.


Market timing costs

costs that arise from price movement of the stock during the time of the transaction
which is attributed to other activity in the stock.


Menu Costs

The costs to firms of changing their prices.


Opportunity costs

The difference in the performance of an actual investment and a desired investment
adjusted for fixed costs and execution costs. The performance differential is a consequence of not being able
to implement all desired trades. Most valuable alternative that is given up.


overhead costs

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.


Transactions Costs Image 4

Period costs

The costs that relate to a period of time.



Policy Acquisition Costs

costs incurred by insurance companies in signing new policies, including expenditures on commissions and other selling expenses, promotion expenses, premium
taxes, and certain underwriting expenses. Refer also to customer, member, or subscriber
acquisition costs.


Political Costs

The costs of additional regulation, including higher taxes, borne by large and
high-profile firms.


Preopening Costs

A form of start-up cost incurred in preparing for the opening of a new store or facility.


Price impact costs

Related: market impact costs


Search costs

costs associated with locating a counterparty to a trade, including explicit costs (such as
advertising) and implicit costs (such as the value of time). Related:information costs.


Semi-fixed costs

costs that are constant within a defined level of activity but that can increase or decrease when
activity reaches upper and lower levels.


Semi-variable costs

costs that have both fixed and variable components.


shortage costs

costs incurred from shortages in current assets.


Standard costs

A budget cost for materials and labour used for decision-making, usually expressed as a per unit cost that is applied to standard quantities from a bill of materials and to standard times from a
routing.


Start-up Costs

costs related to such onetime activities as opening a new facility, introducing
a new product or service, commencing activities in a new territory, pursuing a new class of customer,
or initiating a new process in an existing or new facility.


Sunk costs

costs that have been incurred and cannot be reversed.


Sunk costs

costs that have been incurred in the past.


sunk costs

costs that have been incurred and cannot be recovered.


Trading costs

costs of buying and selling marketable securities and borrowing. Trading costs include
commissions, slippage, and the bid/ask spread. See: transaction costs.


Transactions motive

A desire to hold cash for the purpose of conducting cash based transactions.


Undepreciated Capital Costs

The tax definition of the value of an asset that is eligible for tax deprecation.


variable costs

costs that change as the level of output changes.


ABC inventory classification

A method for dividing inventory into classifications,
either by transaction volume or cost. Typically, category A includes that 20% of
inventory involving 60% of all costs or transactions, while category B includes
the next 20% of inventory involving 20% of all costs or transactions, and category
C includes the remaining 60% of inventory involving 20% of all costs or
transactions.


Matching principle

The process of linking recognized revenue to any associated
costs, thereby showing the net impact of all transactions related to the recognition
of revenue.


Operationally efficient market

Also called an internally efficient market, one in which investors can obtain
transactions services that reflect the true costs associated with furnishing those services.



 

 

 

 

 

 

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