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What is Cost?
In a business, cost expresses the amount of money that is spent on the production or creation of a good or service. Cost does not include a mark-up for profit.
From a seller’s point of view, cost is the amount of money spent to produce a product or good. If sellers sold their goods at the same price as they cost to produce, then they would break even. This means that they would not lose money on their sales, but their company would not make a profit either.
Therefore, the cost of a product from the buyer’s point of view can be called the price. This is the amount charged for a product by the seller, and it includes both the cost to make the product and the mark-up cost added by the seller to produce a profit.
Cost in accounting
In accounting, the term cost refers to the monetary value of expenditures for services, supplies, raw materials, labor, products, equipment, etc. Cost is an amount that is recorded in bookkeeping records as an expense.
Planning for costs
Often, when developing a new company’s business plan, organizers will create cost estimates in order to assess whether the revenues and benefits of the proposed business will more than cover the costs. This is called a cost-benefit analysis.
If costs are underestimated, it can result in a cost overrun once the business begins operations. This means that the costs are higher than income, and the company will lose money.
The Cost Plus model is used by most companies in order to determine a sales price for a product. Cost Plus is when the Price = Cost +/- x %. Here, x indicates the percentage of built in overhead or profit margin that is to be added to the cost.
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