Difference between cost and expense

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

Expense are all disbursements or payments made by the company to produce the product or service, but which 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 revenue. While expenses are not associated with the return from the sale of the product or service.

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

What is cost?

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

Put another way, cost is the investment a company makes in order to produce what it sells. Therefore, cost is a decisive factor in the final price, since it is necessary to include it in the respective calculations in order to make the production of the good or service profitable.

In this sense, there are several types of costs:

Fixed costs

Refers to all costs or payments that must be made by the company on a regular basis, regardless of the production process.

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

Variable costs

These are disbursements that depend on production.

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

Direct costs

These are the cash outlays assigned to the production of a specific product.

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

Indirect costs

These are the disbursements assigned to the production process in general.

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

It is also important to clarify that in accounting terms, costs become expenses when the sale occurs, i.e. when the cost is confronted with a revenue caused by the sale.

Therefore, it is no longer considered an asset becoming an expense.

For example, when a product is purchased for resale in a store, such investment is considered a cost that remains in the list of assets, being incorporated to 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

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, expenses are associated with administrative aspects, which are essential for the maintenance of the company.

An example of an expense would be the payment of finance personnel.

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

Fixed expenses

These are disbursements that are indispensable for the operation of the company, therefore, they must be covered independently of the production of products and services.

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

Variable expenses

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

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

Operating expenses

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

An example of an operating expense is the money spent on advertising, since it should translate into increased sales.

Non-operating expenses

These are cash outflows that do not guarantee income, but must still be paid.

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