Intangible costs are expenses that negatively impact a business but cannot be applied to a specific item or expense. They can occur from changes to employee benefits, production upgrades, or negative customer experiences, leading to decreased productivity and lost revenue.
Intangible costs are costs that have some type of negative impact on the performance of a business, but cannot necessarily be applied to a specific item or expense with the books of account. Instead, these costs occur in a way that has an impact on the overall function of the business. An intangible cost can be expenses that occur while making upgrades to a production line, implementing changes to employee benefits, or anything that impacts relationships developed with customers.
One of the easiest ways to understand intangible costs is to consider the issue of employee productivity. When employees are happy and feel valued by the business, their productivity rate is often close to peak efficiency. If any event has a negative impact on the relationship between the employee and the employer, there is a good chance that the productivity rate will drop. That change in production can be termed as an intangible cost, caused by this change in goodwill between the employees and the employer.
Changes to employee benefits can often lead to intangible costs. For example, if a company chooses to eliminate group health insurance coverage as part of a cost reduction strategy, the company will save a significant amount over the course of a year. At the same time, this loss of insurance will have an adverse effect on employees, who will tend to be less dedicated. As a result, production falls and the business cannot produce at the same level as before. While the company saved money by eliminating health coverage, the savings are less than originally anticipated as production slowed as a result of the action.
The same general idea can lead to intangible costs involving the company’s customers. If a problem, such as a late delivery of a critical order or a problem with a customer service representative, negatively alters the customer’s perception of the business, there is a chance that the customer will start looking for another supplier. After securing a new provider, the customer begins migrating their business to the new provider. The intangible cost to the original provider is lost revenue and the loss of a valuable customer.
Intangible costs tend to come from some factor or set of factors that have diminished or weakened the company in some way. The costs may be in the form of workforce cuts that require remaining employees to take on additional responsibilities, reduced employee benefits, or making changes to a product line that customers don’t accept. In each case, the potential for the business to be negatively affected and therefore less productive is greatly increased.
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