This article is about the economic concept. For the scientific organization, see COST. For uses of "The Cost", see The Cost (disambiguation).
"Expenditure" redirects here. For personal consumption expenditure, see Consumption (economics).
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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.
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Contents
- 1 Types of accounting costs
- 2 Comparing private, external, social, and psychic costs
- 3 Cost estimation
- 4 Path cost
- 5 Manufacturing Costs VS. Non-manufacturing costs
- 6 See also
- 7 References
- 8 Further reading
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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 the cost of using resources for a certain purpose, measured by the benefit given up by not using them in their best alternative use[2] —i.e., you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else. In theoretical economics, cost used without qualification often means opportunity cost.[citation needed]
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.
The main causes of cost underestimation and overrun are optimism bias and strategic misrepresentation (Flyvbjerg et al. 2002). Reference class forecasting was developed to curb optimism bias and strategic misrepresentation and arrive at more accurate cost estimates.[3]
Cost-plus pricing, is where the price equals cost plus a percentage of overhead or profit margin.
Path cost
Also seen as a term in networking to define the worthiness of a path, see Routing.
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:
- Direct materials cost.
- Direct labor cost.
- 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:
- Selling and distribution Costs.
- Administrative Costs.
See also
- average cost
- Cost accounting
- Cost curve
- Expense
- Externality
- fixed costs
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- incremental costs
- life cycle costs
- Outline of industrial organization
- price
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- repugnancy costs
- semi variable costs
- total cost
- variable costs
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References
- ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 16. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
- ^ Regan, Christopher (2008). Microeconomics. Pearson Canada Inc. pp. 6. ISBN 978-0-321-56196-1.
- ^ Flyvbjerg, B., 2008, "Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting in Practice." European Planning Studies, vol. 16, no. 1, January, pp. 3-21.
Further reading
- William Baumol (1968), Entrepreneurship in Economic Theory. American Economic Review, Papers and Proceedings.
- Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl (2002), "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association, vol. 68, no. 3, 279-295.
- 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.
