Cost in Accounting
In
production, research, retail, and accounting, a Cost is the value of money that has been used up to produce
something, and hence is not available for use anymore. In business, the cost
may be one of acquisition, in which case the amount of money expended to
acquire it is counted as cost. In this case, money is the input that is gone in
order to acquire the thing. This acquisition cost may be the sum of the cost of
production as incurred by the original producer, and further costs of
transaction as incurred by the acquirer over and above the price paid to the
producer. Usually, the price also includes a mark-up for profit over the cost
of production.
More
generalized in the field of economics, cost is a metric that is totaling up as
a result of a process or as a differential for the result of a decision. Hence
cost is the metric used in the standard modeling paradigm applied to economic
processes.
Costs
(pl.) are often further described based on their timing or their applicability.
Types of accounting costs
In
accounting, costs are the monetary value of expenditures for supplies,
services, labor, products, equipment and other items purchased for use by a
business or other accounting entity. It is the amount denoted on invoices as
the price and recorded in bookkeeping records as an expense or asset cost
basis.
Opportunity
cost, also referred to as economic cost is the value of the best alternative
that was not chosen in order to pursue the current endeavor—i.e., what could
have been accomplished with the resources expended in the undertaking. It represents
opportunities forgone.
Comparing private, external, and
social costs
When
a transaction takes place, it typically involves both private costs and
external costs.
Private
costs are the costs that the buyer of a good or service pays the seller. This
can also be described as the costs internal to the firm's production function.
External
costs (also called externalities), in contrast, are the costs that people other
than the buyer are forced to pay as a result of the transaction. The bearers of
such costs can be either particular individuals or society at large. Note that
external costs are often both non-monetary and problematic to quantify for
comparison with monetary values. They include things like pollution, things
that society will likely have to pay for in some way or at some time in the
future, but that are not included in transaction prices.
Social
costs are the sum of private costs and external costs.
For
example, the manufacturing cost of a car (i.e., the costs of buying inputs,
land tax rates for the car plant, overhead costs of running the plant and labor
costs) reflects the private cost for the manufacturer (in some ways, normal
profit can also be seen as a cost of production;.
The
polluted waters or polluted air also created as part of the process of producing
the car is an external cost borne by those who are affected by the pollution or
who value unpolluted air or water. Because the manufacturer does not pay for
this external cost (the cost of emitting undesirable waste into the commons),
and does not include this cost in the price of the car (a Kaldor-Hicks
compensation), they are said to be external to the market pricing mechanism.
The air pollution from driving the car is also an externality produced by the
car user in the process of using his good. The driver does not compensate for
the environmental damage caused by using the car.
Cost estimation
When
developing a business plan for a new or existing company, product, or project,
planners typically make cost estimates in order to assess whether revenues/benefits
will cover costs. This is done in both business and government. Costs are often
underestimated, resulting in cost overrun during execution.
Cost-plus
pricing, is where the price equals cost plus a percentage of overhead or profit
margin.
Manufacturing Costs vs.
Non-manufacturing Costs
Manufacturing
Costs are those costs that are directly involved in manufacturing of products.
Examples of manufacturing costs include raw materials costs and charges related
to workers. Manufacturing cost is divided into three broad categories:
- Direct
materials cost.
- Direct
labor cost.
- Manufacturing
overhead cost.
Non-manufacturing
Costs are those costs that are not directly incurred in manufacturing a
product. Examples of such costs are salary of sales personnel and advertising
expenses. Generally non-manufacturing costs are further classified into two
categories:
- Selling
and distribution Costs.
- Administrative
Costs.
Other costs
A
defensive cost is an environmental expenditure to eliminate or prevent
environmental damage. Defensive costs form part of the genuine progress
indicator (GPI) calculations.
Labour
costs would include travel time, holiday pay, training costs, working clothes,
social insurance, taxes on employment &c.
Path
cost is a term in networking to define the worthiness of a path.