What is an Actual Cost?

Actual cost is the actual expenditure made to acquire an asset, which includes the supplier-invoiced expense, plus the costs to deliver, set up, and test the asset. This is the cost of an asset when it is initially recorded in the financial statements as a fixed asset.

The actual cost approach is different from the use of estimates to derive costs that may occur in the future. The two approaches are commonly blended together, so that budgeted costs derived in advance are compared to actual costs to create a variance. The variance can be used to control operations and/or to work on improving the accuracy of predictions.

Characteristics of Actual Cost

The main characteristics of actual cost are as follows:

Historical basis. Actual costs reflect actual financial transactions and resource usage in the past, not future projections or budgeted figures.
Measurable. Actual costs are quantifiable in monetary terms, and so provide a concrete measure of the resources expended during a process or operation.
Accurate. Actual costs reflect precise financial values without approximations, since they are tied to specific invoices, payments, and expenses that have been documented in the accounting system.
Includes all relevant costs. Actual costs encompass all direct and indirect expenses related to a cost object.
Used in financial reporting. Actual costs are recorded in a company's accounting records, and are aggregated into its financial statements.
Basis for cost control. Actual costs are compared with budgeted or standard costs to identify variances. This comparison helps to assess operational efficiency and identifying areas for cost reduction.

In essence, actual costs serve as a factual benchmark, ensuring financial transparency and aiding effective cost management.

Example of Actual Cost

As an example of actual cost, a company buys production equipment for $50,000. The cost to ship it to the company is $1,000. There is also a $500 import tax, as well as a $2,500 charge to set up a concrete pad for it and hook it up to the firm’s electrical system. This means that the total actual cost of the equipment is $54,000.