The difference between gross cost and net cost

Gross cost is the entire acquisition cost of an object. For example, when you buy a machine, the gross cost of the machine may include the following:

+ Purchase price of the equipment
+ Sales tax on the equipment
+ Customs charges (if acquired from another country)
+ Transportation cost
+ Cost of the concrete pad on which the machine is positioned
+ Equipment assembly cost
+ Cost of wiring to power the machine
+ Testing costs
+ Cost to train employees in how to use the machine
= Gross cost

Clearly, there can be an enormous number of ancillary costs that must be considered when aggregating gross costs.

Another example of gross cost is a loan, where the gross cost to the borrower is both the principal and the cumulative amount of related interest to be paid.

Net cost is the gross cost of an object, reduced by any benefits gained from owning the object. Examples of net cost are:

  • The gross cost of a machine, minus the margin on all goods produced with that machine

  • The gross cost of attending college, minus the incremental increase in earnings derived from obtaining a college degree

  • The gross cost of office equipment, minus the salvage value that will be derived from its eventual sale

Thus, the calculation of net cost can yield three possible outcomes, which are:

  1. The net cost equals the gross cost, which occurs when there are no offsetting gains from owning an object;

  2. The net cost is less than the gross cost, which is when the benefits do not entirely offset the gross cost; or

  3. The net cost is actually a gain, which is when the benefits exceed the amount of the gross cost.

An example of the last situation is when a byproduct is generated from a process and is then sold. There may be little or no cost assigned to the byproduct, so any cash received from its sale will likely result in a net cost that is negative (that is, a profit is generated).

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Cost Accounting Fundamentals