A:

Cost is typically the expense incurred for a product or service being sold by a company. The costs involved in manufacturing might include the raw materials used in making the product. The amount of cost it takes to produce a product can have a direct impact on both the price of the product and the profit earned from its sale. 

Price is the amount a customer is willing to pay for a product or service. The difference between the price paid and the costs incurred is the profit. If a customer paid $10 for an item that cost $6 to produce and sell, the company earned $4 in profit. 

For some companies, the total costs of making a product are listed under cost of goods sold, which is the total of the direct costs involved in production. These costs might include the direct materials, such as raw materials, and direct labor for the manufacturing plant.  

On the other hand, a retail store might include a portion of the building's operating expenses and the sales associate's salary in their costs. For the items sold through the company's website rather than the physical store, the expenses of designing and operating the website might be included in the costs.

Of course, every company must determine the price customers will be willing to pay for their product or service, while also being mindful of the cost of bringing that product or service to market.

For more on costs, please read "How Do Operating Expenses and Cost of Goods Sold Differ?"

RELATED FAQS
  1. What is the prime cost formula?

    Prime costs are the costs directly attributed to the production of a product. Before calculating prime costs, direct costs ... Read Answer >>
  2. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  3. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management with budgeting and controlling ... Read Answer >>
  4. Does gross profit include labor and overhead?

    Gross profit is a company's profit after subtracting the costs of producing the goods and services. Several costs impact ... Read Answer >>
  5. How are operating expenses different from SG&A?

    Usually synonymous, operating expenses and selling, general and administrative expenses are sometimes listed as separate ... Read Answer >>
  6. What are general and administrative expenses?

    General and administrative expenses are not directly attributable to the production of goods and services and include audit ... Read Answer >>
Related Articles
  1. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  2. Investing

    The Gross Margin

    A business's "gross margin" is a rough gauge of how profitable its operations are. It measures how much sales revenue the company retains after all of the direct costs associated with making ...
  3. Investing

    Analyzing Operating Margins

    Learn how to analyze operating margins and how to put this aspect of equity analysis to work.
  4. Small Business

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  5. Investing

    Is Net Income The Same As Profit?

    Net income and profit both deal with positive cash flow, but there are important differences between the two concepts.
  6. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  7. Investing

    7 Ways Sales Commissions Hurt Investors

    Although sales commissions are still common they are rarely, if ever, good for the investor.
  8. Personal Finance

    Can You Afford Not to Hire a Financial Advisor?

    People often worry about how much a financial advisor costs instead of what it costs not to have one.
  9. Investing

    Profitability Indicator Ratios

    Learn about profit margin analysis, effective tax rate, return on assets, return on equity and return on capital employed.
  10. Small Business

    Capital Expenditure Versus Revenue Expenditure

    Capital expenditures and revenue expenses have significant differences. Here's the difference between the two.
RELATED TERMS
  1. Unit Cost

    Unit cost is the cost incurred by a company to produce, store ...
  2. Cost of Revenue

    The cost of revenue is the total cost of manufacturing and delivering ...
  3. Prime Cost

    Prime costs are a business's expenses for the elements involved ...
  4. Raw Materials

    Raw materials are commodities companies use when producing or ...
  5. Operating Cost

    Operating costs are expenses associated with the maintenance ...
  6. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
Trading Center