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 an outlay of money in exchange for a good or service purchased (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 the Latin I will consist, translatable as “correspond” or “square”; while “expense” comes from the verb “spend”, which was derived for phonetic reasons from the verb “devastar”, from the Latin vastus. Its link to the idea of paying or disbursing money is obviously the fruit of figurative thinking.
In accounting and administrative matters, it is important to differentiate cost from expense, especially when calculating the price of the final products of a company. Both costs and expenses have their own accounting record, since costs are related to the production process, while expenses are related to administrative functions, financing and sales.
That is to say: costs are those payments necessary for the operation of the productive circuit, that is, to be able to produce goods and services. On the other hand, expenses are those payments or debt acquisitions (increases in liabilities) that carry out the normal operations that accompany production.
Therefore, the former are considered in the balance sheet (that is, they are inventories), 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 | Expenses |
|---|---|
| They are related to production expenses. | They relate to non-operating expenses. |
| They are inventories. | They are not inventories. |
| They are expected to bring future earnings, 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 material, direct labor, factory maintenance, industrial security, etc. | Examples of expenses are: advertising and propaganda, employee training, office rent, distribution, etc. |
Cost and expense example
Let’s imagine a shoe manufacturing and sales company. To make your shoes, you need to buy raw materials (leather, fabric, plastics), use special machines (which require maintenance and electricity) and a specialized labor force. All these factors are considered production costs shoes, as they are essential to obtain the product.
But it is not enough to manufacture them: they have to 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 of their services are considered expenses: distribution expenses, advertising expenses, etc.