Tangible Cost: Meaning and Difference From Intangible Costs

What Is a Tangible Cost?

A tangible cost is a quantifiable cost related to an identifiable source or asset. Tangible costs can be directly connected to a material item used in production or to conduct business operations.

Understanding Tangible Costs

Tangible costs represent expenses that are clearly tied to the item generating the expense. Some examples of tangible costs include:

• Paying employee wages
• Inventory
• Computer systems
• Assets such as equipment, land, or a new factory
• Renting or leasing equipment

Tangible vs. Intangible Costs

Tangible Costs

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.

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 include:

• A fall in employee morale
• Damage to a company's reputation or brand
• Customer dissatisfaction
• Loss of intellectual capital following employee layoffs

Special Considerations

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 a Tangible Cost

For example, let's examine the costs associated with a customer who has received broken merchandise. The company would refund the value of the product to the customer, paying a tangible cost. If the customer is still upset over the event, however, it may prompt the customer to complain about the poor service to friends. The potential loss of sales, resulting from the friends hearing the complaints, consists of an intangible cost relating to the broken merchandise.

Another example of tangible and intangible costs is when companies invest in new technologies. A tangible cost might be the machine that a company purchases. However, the intangible cost is the lost experience and potential lower employee morale from laying off the employee that the machine replaced.