Difference between cost and expense
cost It is all outlay that a company makes to maintain its process of production of goods or services (purchases of raw materials, transportation of products, etc.).
Spending 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 (personnel salaries administrative).
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.
| cost | Spending | |
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| Definition | Outflow 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. |
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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 construction site. Also known as cost of production.
In other words, the 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 It 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 they are 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 It 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 These are the payments assigned to the 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:
- Fixed and variable costs
- Difference between assets, liabilities and capital.
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 spending it would be the payment to the 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 the bills for water, electricity, internet, etc.
Variable expends
They are payments that cannot be predicted, but that must still be covered.
An example of variable spending it 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 It is the money that is invested in advertising, since it should translate into an increase in sales.
Non-operating expenses
They are the outflows of money that do not guarantee income, but that still must be paid.
An example of non-operational expense it is the payment of taxes.
See also:
- Difference between simple interest and compound interest.
- Difference between salary and salary.
- Difference between CEO, COO, CMO, CFO, CIO, CTO, CCO and CDO.
