We explain the difference between cost and expense, their intervention in production, administration and examples of how to differentiate them.
What is the difference between cost and expense?
In everyday speech the notions of cost and expense are used interchangeably, since both represent a disbursement of money in exchange for a good or service acquired (that is, pay). However, in administrative and accounting language, these two words have different meanings, as we will see below.
To begin with, these two words have different origins: “cost” comes from the verb “costar”, which derives from Latin I will establishtranslatable as “correspond” or “square”; while “expense” comes from the verb “spend”, which was derived for phonetic reasons from the verb “devastar”, coming from Latin vastus. Its connection with the idea of paying or disbursing money is obviously the result of figurative thinking.
In accounting and administrative matters, it is important to differentiate cost from expense, especially when calculating the price of a company's final products. Both costs and expenses have their own accounting record, since costs are related to the production process, while expenses are linked to administrative functions financing and sales.
That is to say: costs are those payments necessary for the functioning of the productive circuit, that is, to be able to produce goods and services. On the other hand, expenses are those payments or acquisitions of debt (increases in liabilities) that entail the normal operations that accompany production.
For this reason, the former are considered on the balance sheet (that is, they are inventoriable), while the latter are deducted from income in the income statement.
In this way, the difference between costs and expenses can be summarized as:
| Costs | Bills |
|---|---|
| They are related to production expenses. | They are related to non-operational expenses. |
| They are inventoriable. | They are not inventoriable. |
| They are expected to bring future profits, that is, they recover quickly. | They do not bring future profits, but they can affect the margin of success of the product. |
| Examples of costs are: raw materials, direct labor, factory maintenance, industrial safety, etc. | Examples of expenses are: advertising and propaganda, employee training, office rent, distribution, etc. |
See also: Cost accounting
Example of cost and expense
Let's imagine a company that manufactures and sells shoes. To make your shoes, you need to buy raw materials (leather, fabric, plastics), special machines (which require maintenance and electricity) and specialized labor are used. All of these factors are considered production costs of the shoes, since they are essential to obtain the product.
But it is not enough to manufacture them: they must be distributed, marketed and promoted, and for this the company hires a distributor and an advertising agency. These secondary companies charge, logically, and the payment for their services are considered expenses: distribution expenses, advertising expenses etc.
Continue with: Default costs
References
- “Differences between cost and expense” in CEUPE Magazine.
- “Difference between a cost and an expense” at the Autonomous University of the State of Hidalgo (Mexico).
- “Difference between cost and expense” in Fiscal Moment.
- “Difference between cost and retail expense” at EAE Business School.
