What is Cost?

Cost is the expenditure required to create and sell products and services, or acquire assets. Examples of costs are the cost of goods sold, the cost of advertising, and the cost of employee compensation. Thus, the cost of a product likely includes direct materials, direct labor, and factory overhead. The costs incurred by a business are stated in the expense line items in its income statement.

What is Price?

Price is the amount of money expected in exchange for goods or services. A company sets prices for its goods and services. When customers pay these prices, a sale occurs, which is recorded as revenue in the seller’s accounting records. Prices are usually set by the forces of supply and demand, though they can also be set by the government in a regulated environment. The revenues generated from the prices at which goods and services are sold are noted at the top of the seller’s income statement.

Comparing Cost and Price

The cost of a product can influence its price. For example, if a widget costs $10 to build, then its price must be higher than $10, or else the business cannot earn a profit on its sale. Another interaction between price and cost is that costs are subtracted from prices to arrive at a firm’s profit, either for individual products or in aggregate for the entire firm. For example, if a company generates $1 million of sales from its established product prices, and it incurs $800,000 of costs, then its profit is $200,000.