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Cost
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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.
[1]
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.
Contents
1 Types of accounting costs
2 Comparing private, external, social, and psychic costs
3 Cost estimation
4 Manufacturing Costs VS. Non-manufacturing costs
5 Other costs
6 See also
7 References
8 Further reading
Types of accounting costs
Main articles: accounting cost, opportunity cost, historical cost, marginal cost, sunk cost, and
transaction cost
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 endeavori.e., what could have been accomplished with the resources expended in the
undertaking. It represents opportunities forgone.
In theoretical economics, cost used without qualification often means opportunity cost.
[citation needed]
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Comparing private, external, social, and psychic costs
Main articles: private cost, psychic cost, and social cost
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; see, e.g., Ison and Wall, 2007, p. 181). 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.
A psychic cost is a subset of social costs that specifically represent the costs of added stress or losses to quality of
life.
Cost estimation
Main articles: Cost estimation, Cost overrun, and parametric estimating
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 (see cost-benefit analysis). 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 workers. Manufacturing cost is divided into
three broad categories:
1. Direct materials cost.
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2. Direct labor cost.
3. Manufacturing overhead cost.
Non-manufacturing Costs are those costs that are not directly incurred to manufacture a product. Examples of such
costs are salary of sales personnel and advertising expenses. Generally non-manufacturing costs are further
classified into two categories:
1. Selling and distribution Costs.
2. Administrative Costs.
Other costs
A defensive cost is an environmental expenditure to eliminate or prevent environmental damage. They form part of
the genuine progress indicator (GPI) calculations.
Labour on costs would include travel time, holiday pay, training costs, working clothes.
Path cost is a term in networking to define the worthiness of a path, see Routing.
See also
Average cost
Cost accounting
Cost curve
Expense
Externality
Fixed costs
Incremental costs
Life cycle costs
Outline of industrial
organization
Price
Repugnancy costs
Semi variable costs
Total cost
Variable costs
References
1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action
(http://www.pearsonschool.com/index.cfm?
locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&lev
el=4). Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 16. ISBN 0-13-063085-3.
Further reading
William Baumol (1968), Entrepreneurship in Economic Theory. American Economic Review, Papers and
Proceedings.
Stephen Ison and Stuart Wall (2007), Economics, 4th Edition, Harlow, England; New York: FT Prentice
Hall.
Israel Kirzner (1979), Perception, Opportunity and Profit, Chicago: University of Chicago Press.
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Categories: Costs Generally Accepted Accounting Principles
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