Cost - What is cost?

In business and accounting, cost is the monetary value that a company has spent in order to produce something

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Cost denotes the amount of money that a company spends on the creation or production of goods or services. It does not include the markup for profit.

From a seller’s point of view, cost is the amount of money that is spent to produce a good or product. If a producer were to sell his products at the production price, his costs and income would break even, meaning that he would not lose money on the sales. However, he would not make a profit.

From a buyer’s point of view the cost of a product is also known as the price. This is the amount that the seller charges for a product, and it includes both the production cost and the mark-up, which is added by the seller in order to make a profit.

Cost in accounting

In accounting, the term cost refers to the monetary value of expenditures for raw materials, equipment, supplies, services, labor, products, etc. It is an amount that is recorded as an expense in bookkeeping records.

Types of cost

There are a number of different types of costs for a business. In this context, variable costs and direct costs are arguably the most relevant.

Variable costs have the most financial impact for a company when it comes to producing and delivering products or services. These costs come about as a result of the ordering, shipping, and handling of raw materials. Because these can sometimes require special terms, variable costs are included in the final amount.

Direct costs are also an important aspect to consider in the final mark-up stages of the product or service. Direct costs include the amount of time and effort put into creating the product. In other words, the hours of work that go into the production. Direct costs are another element to consider in final mark-up.

Planning for costs

When a new company’s business plan is developed, organisers will often create cost estimates. These are used to assess whether the benefits and revenues of a proposed business will more than cover the costs. This is called a cost-benefit analysis.

Underestimating the costs of a business may result in a cost overrun once operations begin. This means that costs are higher than the income, and consequently, the company will lose money.

Cost Plus model

Most companies use the Cost Plus model in order to determine a sales price for a product. Cost Plus is when the Price = Cost +/- X %, where X is the percentage of built in overhead or the profit margin that is to be added to the cost.

Cost and Debitoor

Debitoor allows you to record your expenses and upload documents to keep track of costs to your business. Use your smartphone to snap a photo of a receipt while you’re out and about and fill in the details later - it goes directly to your Debitoor account!

Save contact details for your suppliers to quickly enter and auto-fill your expenses and stay on top of the accounting for your business.