Business, Legal & Accounting Glossary

Definition: Cost

Quick Summary of Cost

Cost is referred to as the value of money that has the power to produce any commodity or service. Cost is exhaustible in nature; once cost is given up for any good or service, it cannot be used anymore. Cost can be explained as a certain amount of money, which is used as an input and is exhausted in order to acquire any good or service.

What is the dictionary definition of Cost?

Dictionary Definition

  • Amount of money, time, etc. that is required or used.
  • A negative consequence or loss that occurs or is required to occur.
  • Manner; way; means; available course; contrivance.

Full Definition of Cost

In economics, business, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

Costs are often further described based on their timing or their applicability.

Different Types Of Costs

Cost is a key concept in economics. Cost can be differentiated into several types. The significance of cost lies in the fact that it is incurred while performing several economic activities like production.

Major types of costs can be summarized as:

  • Actual cost: this type of cost refers to the cost incurred due to real transactions.
  • Discretionary cost: this type of cost is not used for increasing current production, but is used for publicity of the firm by advertisements.
  • Production costs: these costs are incurred during the process of production of any commodity. Production costs can be classified according to their usage at different stages of production.
  • Fixed cost: this cost remains fixed at all stages of production. The best example of this type of cost can be the cost of renting an office.
  • Variable cost: this cost depends on the level of production. A higher level of production incurs higher variable costs.
  • Total cost: this is the sum of all type of costs that are incurred in a production process
  • Average cost: when the total cost incurred in the production of any good is divided by the number of goods produced, the average cost is obtained.

A simple equation explains the identities of the above costs:

TC = F + VC×q

Where, TC = total cost, F = fixed cost, VC = variable costs, q = quantity

Again, AC = TC/q = F/q + VC

Where, AC = average cost, TC = total cost, F = fixed costs, VC = variable costs, q = quantity

  • Marginal costs: A marginal cost is the change in total cost due to an increase in one unit production level.

Accounting Vs Opportunity Costs

In accounting, costs are the monetary value of expenditures for supplies, services, labour, products, equipment and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoices as the price and recorded in bookkeeping records as an expense or asset cost basis.

Opportunity cost, also referred to as economic cost is the value of the best alternative that was not chosen in order to pursue the current endeavour—i.e., what could have been accomplished with the resources expended in the undertaking. It represents opportunities forgone.

If a person has a job offer that pays $25 for an hour’s work, and instead chooses to take a nap, then the accounting cost of the nap is zero; the person did not hand over any money in order to nap. However, the opportunity cost is the $25 that could have been earned working.

In theoretical economics, cost used without qualification often means opportunity cost.

Comparing Private, External, Social, And Psychic Costs

When a transaction takes place, it typically involves both private costs and external costs.

Private costs are the costs that the buyer of a good or service pays the seller. This can also be described as the costs internal to the firm’s production function.

External costs (also called externalities), in contrast, are the costs that people other than the buyer are forced to pay as a result of the transaction. The bearers of such costs can be either particular individuals or society at large. Note that external costs are often both non-monetary and problematic to quantify for comparison with monetary values. They include things like pollution, things that society will likely have to pay for in some way or at some time in the future, but that are not included in transaction prices.

Social costs are the sum of private costs and external costs.

For example, the manufacturing cost of a car (i.e., the costs of buying inputs, land tax rates for the car plant, overhead costs of running the plant and labour costs) reflects the private cost for the manufacturer (in some ways, normal profit can also be seen as a cost of production; see, e.g., Ison and Wall, 2007, p. 181). The polluted waters or polluted air also created as part of the process of producing the car is an external cost borne by those who are affected by the pollution or who value unpolluted air or water. Because the manufacturer does not pay for this external cost (the cost of emitting undesirable waste into the commons), and does not include this cost in the price of the car (a Kaldor-Hicks compensation), they are said to be external to the market pricing mechanism. The air pollution from driving the car is also an externality produced by the car user in the process of using his good. The driver does not compensate for the environmental damage caused by using the car.

A psychic cost is a subset of social costs that specifically represent the costs of added stress or losses to quality of life.

Cost Estimates And Cost Overrun

When developing a business plan for a new company, product, or project, planners typically make cost estimates in order to assess whether revenues/benefits will cover costs (see cost-benefit analysis). This is done in both business and government. Costs are often underestimated resulting in cost overrun during implementation. Main causes of cost underestimation and overrun are optimism bias and strategic misrepresentation (Flyvbjerg et al. 2002). Reference class forecasting was developed to curb optimism bias and strategic misrepresentation and arrive at more accurate cost estimates.

Cost Plus, is where the Price = Cost plus or minus X%, where x is the percentage of built-in overhead or profit margin.

Path Cost

Also seen as a term in networking to define the worthiness of a path.

Cite Term

To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
Modern Language Association (MLA):
Cost. Payroll & Accounting Heaven Ltd. April 21, 2021
Chicago Manual of Style (CMS):
Cost. Payroll & Accounting Heaven Ltd. (accessed: April 21, 2021).
American Psychological Association (APA):
Cost. Retrieved April 21, 2021, from website:

Definition Sources

Definitions for Cost are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 19th April, 2020 | 35 Views.