Question

Briefly explain the following terms:

(a)		Service cost
(b)		Interest cost
(c)		Prior service cost
(d)		Vested benefits

Answer 1

answer:-

a) Service cost - Service cost is cost associated with providing the service. for example if we need to get car repaired and mechnic charges $100 for repair and service. $ 100 is service cost

b) Interest cost - Interest cost is cost associated with borrowing the fund for interest.

For Example - Company A borrowed $ 10000 for financing a asset for which bank is charging 5% interest in above case - 10000*5% = 500 is interest cost

c) Prior Service cost - The cost of benefit improvements attributable to plan participants’ prior service pursuant to a plan amendment or a plan initiation that provides benefits in exchange for plan participants’ prior service.

d) Vested benefit refer to benefit that is absolute, complete and does not depend on any condition. employers offer their employees several benefits that are contingent on the employee continuing in service with the employer. Once the employee completes a predetermined number of years of service with that particular employer, the employee earns complete rights to these benefits provided by the employer.