Cost and expense

Cost is any outlay made by a company to maintain its production process of goods or services (purchases of raw materials, transportation of products, etc.).

Expense are all the disbursements or payments that the company makes to produce the product or service, but that are not directly linked to the manufacturing process (salaries of administrative personnel).

The difference between cost and expense in accounting is that costs are considered investments that are directly identified with income. While the expenses are not associated with the return on the sale of the product or service.

Also, costs and expenses are accounted for differently. Costs are considered assets, while expenses are not.

CostSpending
DefinitionOutflow of money that is used in aspects directly related to the production of goods or services.Outflow of money that is used is operational aspects of the company that have no direct link with the production of goods or services.
Characteristics
  • Linked with production.
  • It is essential to generate income.
  • Generate a return on money.
  • Linked with the administrative part.
  • It is essential to maintain the operational part of the company.
  • It does not generate a return of money.
Types
  • Fixed costs.
  • Variable costs.
  • Direct costs.
  • Indirect costs.
  • Fixed costs.
  • Variable expends.
  • Operational expenses.
  • Non-operating expenses.
Examples
  • Payment of raw materials.
  • Payment of the rent of the premises.
  • Tax payment.
  • Payment of salaries for administrative staff.

What is cost?

Cost, in accounting, refers to any payment or disbursement of money that is intended to cover aspects related to the production of goods or services, such as the payment of raw materials or labor. Also known as cost of production.

In other words, cost is the investment that a company makes to be able to produce what it sells. Therefore, the cost is a decisive factor in the final price, since it is necessary to include it in the respective calculations for the production of the good or service to be profitable.

In this sense, there are several types of costs:

Fixed costs

It refers to all the costs or payments that the company must make on a regular basis, regardless of the production process.

An example of fixed costs would be the payment of the rent of the premises where the company operates.

Variable costs

They are the disbursements that depend on the production.

An example of variable costs is raw materials, the price of which can change at any time.

Direct costs

They are the outlays of money that are assigned to the production of a specific product.

An example of direct cost is the payment of the transport of the product to the point of sale.

Indirect costs

They are the disbursements that are assigned to the production process in general.

An example of indirect cost are payments assigned to labor that does not manufacture the product but does intervene in the production process (indirect labor).

It is also important to clarify that in accounting terms, costs become expenses when the sale occurs, that is, when the cost is compared with an income from the sale.

Therefore, it is no longer considered an asset and becomes an expense.

For example, when a product is purchased for resale in a store, this investment is considered a cost that remains on the list of assets, being incorporated into the company’s equity. However, when the product is sold, the asset no longer exists, therefore it becomes an expense.

See also:

What is expense?

An expense is a payment intended to cover operational aspects of the company, although they are not closely linked to the manufacture of the product. Generally, the expenses are associated with administrative aspects, which are essential for the maintenance of the company.

An example of an expense would be payment to finance staff.

On the other hand, expenses are classified into four broad categories:

Fixed costs

They are disbursements that are essential for the operation of the company, therefore they must be covered regardless of the production of products and services.

An example of fixed expenses are bills for water, electricity, internet, etc.

Variable expends

They are payments that cannot be predicted, but must still be covered.

An example of a variable expense is an extra labor payment in an exceptional situation.

Operational expenses

They are the payments that generate some type of remuneration or income for the company.

An example of operational expense is money spent on advertising, as it should translate into increased sales.

Non-operating expenses

They are the outflows of money that do not guarantee income, but that still must be paid.

An example of a non-operational expense is the payment of taxes.

See also:

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