What is the difference between a cost and an expense?
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1 Expert Answer
Craig Y. answered • 06/19/19
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A cost refers to what something costs, i.e. what you would pay for it. It is a cash flow concept. An expense refers to the accounting treatment of a cost. It is a cost that is expensed into the income statement in the current period.
An expense is always a cost, however, a cost can be represented by both an expense (we added $100 to Supplies Expense when we bought all of that paper for the copier at Office Depot), or an asset (the cost of that new 3D Printer was $6,000 which we capitalized as a Fixed Asset).
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Monique H.
The best way to distinguish a cost in comparison to an expense is that a cost varies based on production activity whereas expenses are fixed and exist absent production activity. Costs are important in two ways, budgeting and pricing. Given that you’re able to directly allocate materials and labor to an item, it’s possible to analyze variances that occur between purchase price (budget) and actual results. This analysis is conducted to evaluate performance in terms of wastage. More importantly, you can set a price for your product that yields a break-even point. Of course, you also want to add overhead costs and a profit margin in that calculation. Isolating each unit to its own costs ensures that you recover at least the cost. Some expenses can be traced back to the cost of an item. These are variable overhead expenses, such as utilities that increase due to higher usage. However, managerial/admin expenses should be weighed against profit margin to compare the cost forgone in a make-or-buy decision.06/13/19