In manufacturing accounting, it is important to know the difference between cost and expense. However, in general, these two terms are considered interchangeable.
What Is Cost?
The amount of cash paid or liability incurred for a commodity or service is referred to as the cost of that item. The commodity or service will obtain sales revenue in the future.
In other words, it represents the amount invested in a product or service, the benefit of which has not been fully utilized or consumed in connection with the realization of sale revenue.
What Is Expense?
Expense is that portion of cost which has been expired. As the commodity or service is consumed in the operation of a business enterprise, the consumed portion is converted into the expense. This is charged to the revenue of the period in which it is consumed.
In a nutshell, an expense represents that portion of the acquisition cost of goods or services, which have been expired, consumed, or utilized in connection with the realization of revenue.
Difference Between Cost and Expense
(Cost vs Expense)
Cost means the total amount of money or other resources sacrificed to procure something or to achieve an objective. The word “expense” is also used to denote almost the same thing.
The critical difference between cost and expense is that when the benefit of the resources given up can be realized in the future, this is referred to as a cost.
But where resources given up have no future potential benefit, this is referred to as an expense. Thus, a cost is an unexpired expense and an expense is an expired cost.
Cost is defined as “the benefits given up to acquire goods and services.” Benefits (goods or services) are measured in dollars by the reduction of assets or incurrence of liabilities at the time benefits are acquired.
At the time of the acquisition, the cost incurred is for present or future benefits. When these benefits are received, the cost becomes an expense.
In other words, cost represents the amount invested in obtaining a product or service that has not yet expired, or the benefits or services of which have not yet been received, or which have not yet been utilized or consumed in connection with the realization of revenue.
For example, suppose a machine is purchased for $100,000 on 1 January 2001. Its estimated useful life is 10 years and the scrap value will be $10,000 at the end of the tenth year. Also, $10,000 was paid to set up the machine.
In this example, the cost of the machine on 1 January 2001 is $110,000, but the cost on 31 December 2001 is $99,000 (i.e., 110,000 – 11,000 for depreciation). Prepaid expenses, inventories of various kinds, properties, and other assets are examples of costs.
An expense is defined as a cost that has given a benefit and is now expired.
Unexpired costs that can give benefit in the future are classified as assets. Depreciation of $1,100 ( as discussed in cost) represents the expired cost of a machine for one year and thus may be classified as an expense.
In other words, expenses represent that portion of the acquisition costs of goods, property, or services that have expired, been consumed, or utilized in connection with the realization of revenue.
Let’s consider an example to clarify the difference between a cost and an expense.
Suppose a machine is purchased on 1 January 2018 for $100,000. Transportation and installation charges come to $10,000, and the total cost is $110,000. Suppose the annual depreciation of the asset is $10,000.
The cost of the asset after a year (i.e., on 1 January 2019) will be $100,000 = (110,000 – 10,000), where $10,000 is that portion of the cost that has been utilized during a year. This utilized portion is an example of an expense.