In production

Production (economics)

In economics, production is the act of creating 'use' value or 'utility' that can satisfy a want or need. The act may or may not include factors of production other than labor...

, research

Research

Research can be defined as the scientific search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method...

, retail

Retail

Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...

, and accounting, a cost is the value of money

Money

Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...

 that has been used up to produce something, and hence is not available for use anymore. In business

Business

A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

, 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.

More generalized in the field of economics

Economics

Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, cost is a metric that is totaling up as a result of a process or as a differential for the result of a decision

Decision

A decision is the selection between possible actions.A choice is the selection between two or more objects.The term decision may refer to:* Judgment , as the outcome of a legal case...

. Hence cost is the metric used in the standard modeling paradigm

Paradigm

The word paradigm has been used in science to describe distinct concepts. It comes from Greek "παράδειγμα" , "pattern, example, sample" from the verb "παραδείκνυμι" , "exhibit, represent, expose" and that from "παρά" , "beside, beyond" + "δείκνυμι" , "to show, to point out".The original Greek...

 applied to economic processes

Business process

A business process or business method is a collection of related, structured activities or tasks that produce a specific service or product for a particular customer or customers...

.

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

Accounting vs opportunity costs

In accounting, costs are the monetary value of expenditures for supplies, services, labor, products, equipment and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoice

Invoice

An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...

s as the price and recorded in bookkeeping

Bookkeeping

Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, receipts and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually...

 records as an expense

Expense

In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...

 or asset cost basis

Cost basis

Basis , as used in United States tax law, is the original cost of property, adjusted for factors such as depreciation. When property is sold, the taxpayer pays/ taxes on a capital gain/ that equals the amount realized on the sale minus the sold property's basis.The taxpayer deserves a tax-free...

.

Opportunity cost

Opportunity cost

Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...

, also referred to as economic cost

Economic cost

The economic cost of a decision depends on both the cost of the alternative chosen and the benefit that the best alternative would have provided if chosen. Economic cost differs from accounting cost because it includes opportunity cost....

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

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

Production function

In microeconomics and macroeconomics, a production function is a function that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs...

.

External costs

Externality

In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...

 (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 cost

Social cost

Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits...

s 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 labor 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

Kaldor-Hicks efficiency

Kaldor–Hicks efficiency, named for Nicholas Kaldor and John Hicks, also known as Kaldor–Hicks criterion, is a measure of economic efficiency that captures some of the intuitive appeal of Pareto efficiency, but has less stringent criteria and is hence applicable to more circumstances...

), 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

Psychic cost

A psychic cost is a subset of social costs that specifically represent the costs of added stress or losses to quality of life. In managerial economics and marketing, psychic costs "measure the stress of having to think about a transaction"...

 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

Business plan

A business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals....

 for a new or existing company, product, or project, planners typically make cost estimates in order to assess whether revenues/benefits will cover costs (see cost-benefit analysis

Cost-benefit analysis

Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...

). This is done in both business and government. Costs are often underestimated resulting in cost overrun

Cost overrun

A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting...

 during implementation. Main causes of cost underestimation and overrun are optimism bias

Optimism bias

Optimism bias is the demonstrated systematic tendency for people to be overly optimistic about the outcome of planned actions. This includes over-estimating the likelihood of positive events and under-estimating the likelihood of negative events. Along with the illusion of control and illusory...

 and strategic misrepresentation

Strategic misrepresentation

"Strategic misrepresentation is the planned, systematic distortion or misstatement of fact—lying—in response to incentives in the budget process...

 (Flyvbjerg et al. 2002). Reference class forecasting

Reference class forecasting

Reference class forecasting is the method of predicting the future, through looking at similar past situations and their outcomes.Reference class forcasting predicts the outcome of a planned action based on actual outcomes in a reference class of similar actions to that being forecast. The theories...

 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.

Manufacturing Costs VS. Non-manufacturing costs

Manufacturing Costs are those costs that are directly involved in manufacturing

Manufacturing

Manufacturing is the use of machines, tools and labor to produce goods for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to industrial production, in which raw materials are transformed into finished goods on a large scale...

 of products. Examples of manufacturing costs include raw materials costs and charges related workers. Manufacturing cost is divided into three broad categories:

1. Direct materials cost
   Direct materials cost
   Direct materials cost is the cost of direct materials which can be easily identified with the unit of production. For example, the cost of glass is a direct materials cost in light bulb manufacturing....
   
   .
2. Direct labor cost
   Direct labor cost
   Direct labor cost is a part of wage-bill or payroll that can be specifically and consistently assigned to or associated with the manufacture of a product, a particular work order, or provision of a service also, we can say also it is the cost of the work done by those worker who actually make the...
   
   .
3. Manufacturing overhead cost.

Non-manufacturing Costs are those costs that are not directly incurred to manufacture a product

Product

- Business :*Product , an item that ideally satisfies a market's want or need**Product , a deliverable or set of deliverables that contribute to a business solution**Nanoproduct, a product that has been enhanced with nanotechnology...

. Examples of such costs are salary of sales personnel and advertising

Advertising

Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...

 expenses. Generally non-manufacturing costs are further classified into two categories:

1. Selling and distribution Costs.
2. Administrative Costs.

Biological cost

In biology

Biology

Biology is a natural science concerned with the study of life and living organisms, including their structure, function, growth, origin, evolution, distribution, and taxonomy. Biology is a vast subject containing many subdivisions, topics, and disciplines...

, the biological cost or metabolic price is a measure of the increased energy metabolism that is required to achieve a function. Drug resistance

Drug resistance

Drug resistance is the reduction in effectiveness of a drug such as an antimicrobial or an antineoplastic in curing a disease or condition. When the drug is not intended to kill or inhibit a pathogen, then the term is equivalent to dosage failure or drug tolerance. More commonly, the term is used...

 in microbiology, for instance, has a very high metabolic price, especially for antibiotic resistance

Antibiotic resistance

Antibiotic resistance is a type of drug resistance where a microorganism is able to survive exposure to an antibiotic. While a spontaneous or induced genetic mutation in bacteria may confer resistance to antimicrobial drugs, genes that confer resistance can be transferred between bacteria in a...

 

See also

• average cost
  Average cost
  In economics, average cost or unit cost is equal to total cost divided by the number of goods produced . It is also equal to the sum of average variable costs plus average fixed costs...
  
  
• accounting costs
• Cost accounting
  Cost accounting
  Cost accounting information is designed for managers. Since managers are taking decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations...
  
  
• cost-benefit analysis
  Cost-benefit analysis
  Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
  
  
• Cost curve
  Cost curve
  In economics, a cost curve is a graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms use these curves to find the optimal point of production , and profit maximizing firms can use them to decide output quantities to...
  
  
• Cost overrun
  Cost overrun
  A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under-estimation of the actual cost during budgeting...
  
  
• Expense
  Expense
  In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
  
  
• Externality
  Externality
  In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...
  
  
• fixed cost
  Fixed cost
  In economics, fixed costs are business expenses that are not dependent on the level of goods or services produced by the business. They tend to be time-related, such as salaries or rents being paid per month, and are often referred to as overhead costs...
  
  s

• historical cost
  Historical cost
  In accounting, historical costs is the original monetary value of an economic item. Historical cost is based on the stable measuring unit assumption. In some circumstances, assets and liabilities may be shown at their historical cost, as if there had been no change in value since the date of...
  
  
• incremental costs
• life cycle costs
  Life cycle cost analysis
  Life cycle cost analysis may refer to:* Life cycle assessment, the investigation and valuation of the environmental impacts of a given product or service caused or necessitated by its existence...
  
  
• list of economics topics
• list of accounting topics
• marginal cost
  Marginal cost
  In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...
  
  
• opportunity cost
  Opportunity cost
  Opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen . It is the sacrifice related to the second best choice available to someone, or group, who has picked among several mutually exclusive choices. The opportunity cost is also the...
  
  s
• parametric estimating
• price
  Price
  -Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
  
  

• private costs
• production, costs, and pricing
  Production, costs, and pricing
  The following outline is provided as an overview of and topical guide to industrial organization:Industrial organization – describes the behavior of firms in the marketplace with regard to production, pricing, employment and other decisions...
  
  
• psychic cost
  Psychic cost
  A psychic cost is a subset of social costs that specifically represent the costs of added stress or losses to quality of life. In managerial economics and marketing, psychic costs "measure the stress of having to think about a transaction"...
  
  s
• repugnancy costs
  Repugnancy costs
  Repugnancy costs are costs borne by an individual or entity as a result of a stimulus that goes against that individual or entity's cultural mores. The cost could be emotional, physical, mental or figurative. The stimulus could be anything from food to people to an idea.These costs are...
  
  
• semi variable cost
  Semi variable cost
  Semi-variable cost is an expense which contains both a fixed-cost component and a variable-cost component. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the level of activity achieved by the entity. On the other hand the variable component of the cost is...
  
  s
• social cost
  Social cost
  Social cost, in economics, is generally defined in opposition to "private cost". In economics, theorists model individual decision-making as measurement of costs and benefits...
  
  s
• sunk cost
  Sunk cost
  In economics and business decision-making, sunk costs are retrospective costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken...
  
  s
• total cost
  Total cost
  In economics, and cost accounting, total cost describes the total economic cost of production and is made up of variable costs, which vary according to the quantity of a good produced and include inputs such as labor and raw materials, plus fixed costs, which are independent of the quantity of a...
  
  
• transaction cost
  Transaction cost
  In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
  
  s
• variable cost
  Variable cost
  Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct Costs, however,...
  
  s

Further reading

• William Baumol (1968), Entrepreneurship in Economic Theory. American Economic Review, Papers and Proceedings.
• Bent Flyvbjerg, Mette K. Skamris Holm, and Søren L. Buhl (2002), "Underestimating Costs in Public Works Projects: Error or Lie?" Journal of the American Planning Association, vol. 68, no. 3, 279-295.
• Stephen Ison and Stuart Wall (2007), Economics, 4th Edition, Harlow, England; New York: FT Prentice Hall.
• Israel Kirzner (1979), Perception, Opportunity and Profit, Chicago: University of Chicago Press.