Look around you and you would be surprised by the number of sinners walking freely. Did you just ask why? Well here is the reason.
Most people are guilty of using price and cost interchangeably to mean the amount of money required to buy something in our day to day interactions.
In the business, economics or accounting setting, these words different and one must not be used as a synonym to the other nor confused with each other.
This begs the question: what is the difference between price and cost. But before we delve into the key differences between them, let’s find out the meaning of each of these terms.
What is Cost?
Cost is best viewed from a business’ perspective, and it is the amount of money that is incurred to produce particular goods or services before it is sold to the end-users or consumers.
All that goes into making a product are referred to as cost and the amount incurred in this process is usually the basis which businesses use for determining the price of the resulting output.
Costs are necessary to run a business and they are incurred in many forms, part of which includes Labour, Raw materials, Marketing, Rent, Depreciation etcetera
Cost may be classified as Fixed Cost, Variable Cost, Mixed Cost, Opportunity cost, Sunk cost, and so and so forth.
Fixed cost is the same as Overhead cost, these expenses are incurred by businesses regardless of the level production i.e. the same amount is incurred when output is 1000, 100, or even zero.
On the other hand, Variable costs vary directly to the quantity of output. Examples include Labour and Raw material cost.
What is Price?
The actual value or amount of money paid by consumers or end-user to acquire goods or services for use is simply what price means. Price is viewed from the perspective of the buyer or consumer.
In the capitalists economy, price is one of the things businesses have a certain degree of control on, as it is fixed by forces of demand and supply while it is mostly determined by a central body in a communist system.
Prices are usually higher when the quantity supplied to the market is lower than the demand for it.
The simple theory of demand and supply is a core principle underlying economic theory.
Demand refers to how much of that product, item, commodity, or service consumers are willing and able to purchase at a particular price over a period fo time.
In other words, supply relates to how much the producers of particular goods or service are willing to produce and can provide to the market with a limited amount of resources.
Price and Cost are very important components of sales that every business must get right in order to remain profitable. The price must be at a level sufficient to cater for the cost incurred in making the product
The difference between the cost and price of a product is referred to as the profit, that is, if a company incurs $100 to create a good and sells it for $150. The profit earned is $50.
If the price is too low, the revenue resulting from sales may not be enough to cover the cost incurred to make the product and this can only spell doom for the company involved.
Cost versus Price
The major difference between cost and price is that cost is the amount incurred by businesses on raw materials, labour, wages, marketing and other activities needed to create value in terms of products or services while Price is the amount of money paid to businesses by end-users or consumers to acquire the rights to use the concerned product.
Nonetheless, beyond this glaring difference, there are other differences between these two concepts which you will learn more about in the ensuing paragraphs.
- Price is determined by forces of demand and supply in the market, this gives businesses the power to determine the price of their products. For instance, businesses could reduce the quantities of products made available to the market to charge a higher price.
- The cost can be further classified into Fixed, Variable, Sunk costs, Mixed costs etc while Price is categorized into selling price, transaction price, bid price etcetera
- In business, the Cost is first determined and incurred before Price of the product is fixed.
- Businesses have different methods for estimating Price and are at liberty to choose any that best suits them; Cost can be assessed on the actual expenditure that is incurred on producing the goods or services
- Price is the combination of cost and profit, and are higher than cost whereas cost is a subset of the price
- The value of cost is lower than the value of price since Price is a cumulation of the various cost incurred plus the profit element.
- Price is future earnings to the producer while cost represents past expenses whereas to the buyer, price is required for the future acquisition of a product
- Cost is demanded from the producer while Price is demanded from the buyer. This means that cost is best ascertained from the perspective if the producer while Price is best ascertained from the view of consumers.
Both cost and price are relevant to the concept of money, and even though both are used interchangeably, both are not to be confused nor used interchangeably as they both represent different things when applied in business, accounting or economics.
Price is used to acquire something while Cost is required to maintain or produce goods or services.
Businesses must take into consideration, the amount required to manufacture a product before setting the price while also ensuring the price is at a reasonable level that the consumer would be willing to pay.
I hope you have been able to learn the differences between cost and price in this post. You can drop any suggestion or questions in the comment section and see it attended to. Don’t forget to hit the share button!