Cost definition
/What is Cost?
Cost is the expenditure required to create and sell products and services, or to acquire assets. When sold or consumed, a cost is charged to expense. In the case of an asset, the charge to expense could be significantly deferred. The cost concept underlies the transition of assets from the balance sheet to expenses in the income statement. When a cost is designated as an expense, it can be assigned to a wide range of possible expenses, such as:
Thus, the nature of a cost drives the type of expense to which it is eventually assigned.
Types of Costs
For analysis purposes, there are several types of costs, which are as follows:
Variable cost. A cost may be designated as a variable cost, which varies with the level of activity. For example, the telephone cost tends to vary with the number of employees.
Fixed cost. A cost can be designated as a fixed cost, which means that it does not vary with changes in the level of activity. For example, the lease of a building will not vary, irrespective of the revenues of a business housed within that facility.
Mixed cost. A cost may be a mixture of a fixed cost and a variable cost, with a fixed component and a variable component; this is called a mixed cost.
Cost FAQs
How is cost different from expense?
Cost is the amount incurred to acquire or produce an asset, such as paying for raw materials or equipment. Expense is the portion of that cost recognized on the income statement when the asset’s benefit is consumed, like depreciation or cost of goods sold. In short, cost represents acquisition, while expense represents usage.
How can a cost be manipulated?
A cost can be manipulated by capitalizing expenses that should be charged immediately, delaying write-offs, using biased overhead allocation rates, shifting costs between periods, excluding necessary indirect costs, or classifying normal costs as unusual or nonrecurring. These actions can overstate assets, understate expenses, and distort reported profit margins.