Definition: In business and accounting, cost is the monetary value that a company has spent in order to produce something.
Cost denotes the amount of money that a company spents on the creation or production of goods or services. It does not include the mark-up for profit.
From a
seller’s point of view, cost is the amount of money that is spent to produce a good or a product. If a seller sold his products at the production price, he would break even, meaning that he would not lose money on his sales. However, he would not make a profit either.
From a
buyer’s point of view the cost of a product can be called the price. This is the amount that the seller charges for a product, and it includes both the production cost and the mark-up cost, which is added by the seller in order for him 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.
Planning for costs
When a new company’s business plan is developed, organizers 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 %. X is the percentage of built in overhead or the profit margin that is to be added to the cost.