production Production may refer to: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (goods and services) * Production as a stati ...

research Research is "creativity, creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization and analysis of evidence to increase understanding of a topic, characterized by a particular att ...

retail Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturers, directly or through a wholesaler, and t ...

, and

accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...

, a cost is the value of money that has been used up to produce something or deliver a service, 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 A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the c ...

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 Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, cost is a

metric Metric or metrical may refer to: * Metric system, an internationally adopted decimal system of measurement * An adjective indicating relation to measurement in general, or a noun describing a specific type of measurement Mathematics In mathem ...

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 A model is an informative representation of an object, person or system. The term originally denoted the plans of a building in late 16th-century English, and derived via French and Italian ultimately from Latin ''modulus'', a measure. Models c ...

paradigm In science and philosophy, a paradigm () is a distinct set of concepts or thought patterns, including theories, research methods, postulates, and standards for what constitute legitimate contributions to a field. Etymology ''Paradigm'' comes f ...

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

invoice An invoice, bill or tab is a commerce, commercial document issued by a sales, seller to a buyer relating to a sale transaction and indicating the product (business), products, quantities, and agreed-upon prices for products or Service (economic ...

s as the

and recorded in

book keeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. ...

records as an

expense An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is a ...

or asset

cost basis Basis (or cost basis), as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/(saves) taxes on a capital gain/(loss) that equals the amount realized ...

Opportunity cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...

, also referred to as ''

economic cost Economic cost is the combination of losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. The comparis ...

'' 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. In theoretical economics, cost used without qualification often means opportunity cost.

The cost concept of accounting

The cost concept depicts that an asset must be recorded on the purchase value. Economic and operational factors should not lead to changes in the value of cost recorded for the business. For instance, if the company opts to follow the cost concept, the PPE purchase in the past must remain on the cost. For instance, land purchase by the company remains the same without applying depreciation and revaluation. However, if the company opts to follow the revaluation method, it can update the cost by passing a journal entry. Further, this journal entry impacts the OCI and assets in the balance sheet. For instance, if the revaluation is made, the following journal entry is posted in the accounting system. The debit impact of the transaction is recording an increase in the asset value. On the other hand, credit impact is recording unrealized gains in equity. As we keep on charging depreciation, the unrealized gain keeps on decreasing and being realized. However, it's limited to additional depreciation due to revaluation. On the other hand, if the business opts to follow the cost concept, it's not allowed to record revaluation. The cost concept comes with the following pros and cons.

Pros of cost concept in accounting.

# It is easy to locate the purchase price of an asset. There is no revaluation, and there is no change in the amount/balance of the asset. # It is easy to locate the cost of the assets as there is no judgment. Instead, there is objectivity. For instance, you record assets at the purchased price. # A higher degree of judgment is involved in the process of revaluation. # It is often difficult to trace the movement in revalued assets. # Organizations following the revaluation concept need to apply technical accounting rules regarding unrealized gain, and depreciation.

Cons of cost concept in accounting

Books do not reflect present/fair value. Hence, financial statement may not present the true picture of the business.

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 In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods. The production function is one of the key concepts of mainstream neoclassical theories, used to define ...

External costs In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either co ...

(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, even so that are not included in transaction prices.

Social cost Social cost in neoclassical economics is the sum of the private costs resulting from a transaction and the costs imposed on the consumers as a consequence of being exposed to the transaction for which they are not compensated or charged. In other w ...

s 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 Environmental degradation is the deterioration of the environment through depletion of resources such as quality of air, water and soil; the destruction of ecosystems; habitat destruction; the extinction of wildlife; and pollution. It is defin ...

caused by using the car.

Cost estimation

When developing a

business plan A business plan is a formal written document containing the goals of a business, the methods for attaining those goals, and the time-frame for the achievement of the goals. It also describes the nature of the business, background information on t ...

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 A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...

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 cost Manufacturing cost is the sum of costs of all resources consumed in the process of making a product. The manufacturing cost is classified into three categories: direct materials cost, direct labor cost and manufacturing overhead. It is a factor in ...

s are those costs that are directly involved in

manufacturing Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to a r ...

of products. Examples of manufacturing costs include

raw materials A raw material, also known as a feedstock, unprocessed material, or primary commodity, is a basic material that is used to produce goods, finished goods, energy, or intermediate materials that are feedstock for future finished products. As feedst ...

costs and charges related to workers. Manufacturing cost is divided into three broad categories: #

Direct materials cost Direct materials cost the cost of direct materials which can be easily identified with the unit of production. For example, the cost of glass is a direct materials cost in light bulb manufacturing. The manufacture of products or goods required ma ...

. #

Direct labor cost Direct labor cost is a part of wage-bill or payroll that can be specifically and consistently assigned to or associated with the manufacture of a product, a particular work order, or provision of a service. Also, we can say it is the cost of the wor ...

. #

Manufacturing overhead cost Manufacturing overhead costs (MOH cost) are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way. Examples include supplies, ...

. Non-manufacturing costs are those costs that are not directly incurred in manufacturing a

product Product may refer to: Business * Product (business), an item that serves as a solution to a specific consumer problem. * Product (project management), a deliverable or set of deliverables that contribute to a business solution Mathematics * Produ ...

. Examples of such costs are salary of sales

personnel Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...

and

advertising Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...

expenses. Generally, non-manufacturing costs are further classified into two categories: #Selling and distribution costs. #

Administrative Administration may refer to: Management of organizations * Management, the act of directing people towards accomplishing a goal ** Administrative Assistant, traditionally known as a Secretary, or also known as an administrative officer, administ ...

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, see

Routing Routing is the process of selecting a path for traffic in a network or between or across multiple networks. Broadly, routing is performed in many types of networks, including circuit-switched networks, such as the public switched telephone netw ...