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Accounting cost is the amount paid by a company for resources or inputs, recorded in accounting books to determine pricing and expected profit margin. GAAP requires recording at actual cost and may include additional business costs. Capital investment purchases are recorded at historical cost and depreciated. Economic cost is the sacrifice a company faces in producing goods or services.
An accounting cost is the amount paid by a company for economic resources or business inputs. Businesses record these costs in their accounting books so they have an accurate record of how much money has been spent on the resources or inputs needed to generate profits. Accounting costs are also used to determine how companies should price goods and services sold to consumers. companies must have an accurate accounting cost to calculate the company’s expected economic profit margin. While companies may have different methods for pricing goods and services, in the US, accounting cost is generally recorded in accordance with generally accepted accounting principles (GAAP).
GAAP requires companies to record items purchased for use in the business at the actual cost paid by the business for the item. Companies may be allowed to include acquisition costs not directly related to economic resources or business inputs with the accounting cost. Common accounting cost inclusions can be shipping or freight charges, sales tax, handling fees, or other various business costs. Businesses can include these costs to ensure that all business costs are passed on to the consumer. If companies don’t pass these additional business costs on to customers, they can increase their profit margin by pricing individual products to offset these costs.
Companies traditionally record capital investment purchases at historical cost. Capital investment purchases typically represent the main assets used by the company to produce goods and services; these assets may include buildings, vehicles, equipment or tools used in the company’s business operations. Although these items are recorded using historical carrying cost as the base value in the ledger, GAAP requires companies to depreciate the value of these items as they are used in the business. Depreciation assures external users of the company’s financial information that the value of the asset represented in the financial statements is an accurate representation of the asset.
Accounting cost is different from economic cost. An economic cost is generally defined as the sacrifice a company faces in producing goods or services. Economic cost theory is rooted in the economic concept that firms must sacrifice one resource to obtain another. A common term for this economic phenomenon is known as opportunity cost. Examples of opportunity costs can be seen when a company purchases raw materials instead of saving that money in a bank account. Businesses forgo the ability to earn interest by saving money by buying more economic resources for business operations.
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