Q: What does cost means to you in your business? And is there any difference between cost and price?
A: In the real world of business and management accounting, cost represent an important concept in operations and financial management. Business owners and managers must have a good grasp of this concept. This is because you have to determine the cost of your product, the cost of an asset, cost of acquisition of a customer etc. Cost has varied meaning and definition, for example, there are:
- Direct and Indirect cost
- Fixed and Variable Cost
- Prime and Conversion Cost.
- Manufacturing Cost
- Product Cost
- Opportunity Cost
Costs are very important in taking management decisions. It affects both the profitability and cash flow of your business. If your business is on a high cost level, it means you are likely to have low margin which we require you to sell high volume to be able to meet profitability and cash flow. It is vice-versa if you run a low cost product.
There is a tendency for cost and price to be confused. This is because what is price to your business is cost to others, and what is cost to you is price to others.
Price is the per unit product or service of what your business sells to generate her revenue. While the amount it takes a company to produce a unit of her product or service is known as cost.
However, there is a relationship between the price and cost. The difference between the price and cost is called a margin.