What Is an Outlay Cost?
An outlay cost is a cost incurred in order to execute a strategy or acquire an asset. Outlay costs are also paid to vendors to acquire goods such as inventory or services, such as consulting or software design. They are concrete expenses that are actually incurred in order to achieve a goal.
- Outlay costs are any costs incurred to acquire an asset or execute a strategy, but can also be costs paid to vendors for goods or services.
- For corporations, outlay costs for new projects include start-up, production, and asset acquisition costs.
- Outlay costs do not include foregone profits or benefits—also known as opportunity costs. Total costs include both the outlay cost and opportunity cost.
- Outlay costs reduce earnings immediately with cash accounting, while with accrual accounting they are split across all periods the expense applies and matched to related revenues.
How Outlay Costs Work
Outlay costs are easy to recognize and measure because they have actually been paid to outside vendors, as opposed to opportunity costs which are not actually incurred and paid to outside parties by the company.
For corporations, outlay costs for new projects include start-up, production, and asset acquisition costs. They can also include hiring costs for strategies or projects that require an addition to the workforce in order to be carried out.
Outlay costs include the expenses paid by a business in order to manufacture a product or provide a service, and also include fees paid to outside parties to acquire assets or services. In cash accounting, outlay costs immediately reduce earnings. In accrual accounting, outlay costs are split across all the periods that the expense applies to and matched to related revenues.
Outlay costs do not include foregone profits or benefits—such costs are known as opportunity costs and are hidden, but an important component of a business's profitability.
Outlay Cost vs. Total Cost
Outlay costs, sometimes referred to as explicit costs, are direct expenses paid. These expenses can be one-time, such as repair bills, or recurring—e.g. subscription services. Direct costs can also be predictable, e.g. rent, or vary, such as utility bills.
Meanwhile, the total cost is both the outlay cost and opportunity cost. So while outlay costs include direct payment, total costs include any indirect losses or missed benefits. That is, opportunity costs are those benefits a business misses out on by choosing one option over another.
Example of an Outlay Cost
For example, if XYZ Manufacturing Company wants to purchase a new widget press they will not only have to pay for the widget press but for the fees associated with transporting the widget press to their facility, as well as the costs for getting the widget press up and running and possibly expenses for training workers to use the new widget press. All of these are outlay costs associated with acquiring a new widget press.
Then there are the implied costs of choosing one widget press over another. In addition, the other opportunity costs include choosing the widget press over another type of equipment or method.