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In
production Production may be: 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 statistic, g ...
,
research Research is "creative and systematic work undertaken to increase the stock of knowledge". It involves the collection, organization and analysis of information to increase understanding of a topic or issue. A research project may be an expa ...

research
,
retail Retail is the sale of goods In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption ( ...

retail
, and
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
, 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 Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by ...

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 Economics () is a 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 interact ...

economics
, cost is a
metric METRIC (Mapping EvapoTranspiration at high Resolution with Internalized Calibration) is a computer model Computer simulation is the process of mathematical modelling, performed on a computer, which is designed to predict the behaviour of or th ...
that is totaling up as a result of a process or as a differential for the result of a
decision
decision
. Hence cost is the metric used in the standard
modeling In general, 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. ...
paradigm In science Science () is a systematic enterprise that Scientific method, builds and organizes knowledge in the form of Testability, testable explanations and predictions about the universe."... modern science is a discovery as well as ...
applied to economic
processes A process is a series or set of Action (philosophy), activities that interact to produce a result; it may occur once-only or be recurrent or periodic. Things called a process include: Business and management *Business process, activities that pro ...
. 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 :''See also Voucher: an invoice is within the European union primarily legally defined by the EU VAT directive as an accounting voucher (to verify tax and VAT reporting) and secondly as a Civil law (common law) document. An invoice, bill or tab is ...

invoice
s as the
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by ...

price
and recorded in
book keeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organisations. It involves preparing source documents for all transactions, operations, and other events of a business. Tra ...
records as an
expenseExpenditure is an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. For students or parent ...
or asset
cost basis Basis (or cost basis), as used in United States tax law The United States, United States of America has separate Federal government of the United States, federal, U.S. state, state, and Local government in the United States, local governments with ...
.
Opportunity cost In microeconomic theory Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics Economics () is the social science that studies how people interact with value; in particular, the Produ ...
, also referred to as ''
economic costEconomic 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 factors t ...
'' 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.


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 Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
.
External costs In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...

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, even so that are not included in transaction prices.
Social cost Social cost in neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand In microeconomics, supply and ...
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 damageImage:Wallaroo-mines-0749.jpg, Eighty-plus years after the abandonment of Wallaroo Mines (Kadina, South Australia), mosses remain the only vegetation at some spots of the site's grounds. Environmental degradation is the deterioration of the environm ...
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 Business is the activity of making one's living or making money by producing or buying and selling Product (business), products (such as goods and services). Simpl ...

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 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 an underestimation of the actual cost during budgeting, they are known by these terms. ...
during execution.
Cost-plus pricing Cost-plus pricing is a pricing strategy by which the selling price of a product is determined by adding a specific fixed percentage (a " markup") to the product's unit cost The unit cost is the price incurred by a company to produce, store and se ...
, is where the price equals cost plus a percentage of overhead or profit margin.


Manufacturing costs vs. non-manufacturing costs

Manufacturing costManufacturing 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 (business), overhead. ...
s are those costs that are directly involved in
manufacturing Manufacturing is the creation or Production (economics), production of goods with the help of equipment, Work (human activity), labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector ...
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 In economics Economics () is the social science that studies how people interact with value; in pa ...
costs and charges related to workers. Manufacturing cost is divided into three broad categories: #
Direct materials costDirect 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 mate ...
. #
Direct labor costDirect 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 In produc ...
. # 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 Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profit, not-for-profit organization, co-operative or ot ...

personnel
and
advertising Advertising is a marketing Marketing is the process of intentionally stimulating demand for and purchases of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emphasi ...

advertising
expenses. Generally, non-manufacturing costs are further classified into two categories: #Selling and distribution costs. #
Administrative Administration may refer to: Management of organizations * Management Management (or managing) is the administration of an organization, whether it is a business, a not-for-profit organization, or government body. Management includes th ...
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 theory, network or between or across multiple networks. Broadly, routing is performed in many types of networks, including circuit switching, circuit-switched networks, such as ...

Routing
.


See also

*
Average costIn economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and ...
*
Cost accounting Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, all ...
*
Cost curveIn economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and ...
*
Cost object A cost object is a term used primarily in cost accounting Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in d ...
*
Direct costImage:CVP-TC-FC-VC.svg, 240px, Decomposing Total Costs as Fixed Costs plus Variable Costs. The quantity of output is measured on the horizontal axis. Variable costs are costs that change as the quantity of the good or service that a business produce ...
*
Fixed cost In accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compa ...

Fixed cost
* Incremental cost *
Indirect cost Indirect costs are costs that are not directly accountable to a cost object (such as a particular project, facility, function or product). Indirect costs may be either fixed or variable. Indirect costs include administration, personnel and security ...
*
Life-cycle cost Whole-life cost is the total cost of ownership Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or service. It is a management accounting In management a ...
*
Outline of industrial organization The following outline is provided as an overview of and topical guide to industrial organization: Industrial organization In economics Economics () is the social science that studies how people interact with value; in particular, th ...
* Repugnancy costs * Semi-variable cost *
Total cost In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plan ...
*
Variable cost 240px, Decomposing Total Costs as Fixed Costs plus Variable Costs. The quantity of output is measured on the horizontal axis.">Fixed_Costs.html" ;"title="Total Costs as Fixed Costs">Total Costs as Fixed Costs plus Variable Costs. The quantity of ou ...


References


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. {{Authority control