What is Intangible Cost?
An intangible cost is an unquantifiable cost emanating from an identifiable source that can impact, usually negatively, overall company performance. Many intangible costs arise from causes that are social, legal, or political - rather than being material in nature. Ignoring intangible costs can have a significant effect on a company's performance.
These may be contrasted with tangible costs, which are both identifiable and quantifiable. Intangible cost may also be contrasted with intangible assets, which are benefits that similarly cannot be directly measured.
- An intangible cost is a cost that can be identified but cannot be quantified or accurately estimate.
- Common intangible costs include impaired goodwill, loss of employee morale, or brand damage.
- While not directly measurable, intangible costs can have a very real impact on a company's bottom line.
Understanding Intangible Costs
An intangible cost consists of a subjective value placed on a circumstance or event in an attempt to quantify its impact. Although intangible costs are more difficult to quantify, they have a real, identifiable source. Intangible costs can stem from variety of expenses including losses in productivity, an impairment to goodwill, decline in employee morale, loss of brand value or damage to brand equity. While intangible costs do not have a concrete value, managers often attempt to estimate the impact of these costs as they can have a very real effect on productivity which can adversely affect a company's bottom line.
. Tangible costs are often associated with items that also have related intangible costs. A tangible cost is the money paid to a new employee to replace an old one. An intangible cost is the knowledge the old employee takes with them when they leave.
While intangible costs do not have a concrete value, managers often attempt to estimate the impact of the intangibles since they can have a real effect on productivity, costs, and a company's bottom line.
In doing a cost-benefit analysis, company executives estimate both the tangible and intangible costs before moving forward with changes or a new direction. The tangible costs factor heavily in making decisions involving large fixed assets such as production machinery or a new factory. Underestimating a tangible cost can lead to lower profits while overestimating tangible costs might lead to avoiding a potentially lucrative avenue.
Examples of Intangible Costs
For example, let's examine a potential decision by a widget company to cut back on $100,000 in employee benefits to maximize profits. When news reaches the employees of the cut-back, worker morale will likely drop leading to a decline in productivity which results in lower revenues. The employee's focus on losing benefits instead of making products represents an intangible cost, which may be larger than the gains realized by reducing employee benefits.
As another example, if a toy company produces a toy that ends up injuring a portion of the children that play with it, that company will likely have damage to their reputation. This damage may lead to an increase in the tangible costs, such as the expense associated with a recall and money paid to settle lawsuits. The reputational damage itself, however, is considered an intangible cost.