What is Cost

Cost can be defined in many ways. The definition varies based on the perspective taken when performing a cost analysis, i.e., defining who incurs the cost. Generally, cost denotes a loss or a sacrifice, which may or may not be quantifiable, but is usually incurred in the course of gaining something. Cost is the value of something that is expended to obtain a benefit, or it is the quantity of one thing that is exchanged for a service or a product. In more technical terms, cost can be defined in economic and financial terms:

• Monetary or financial cost. The expenses incurred for an input or to provide a product or service, at a given time (e.g., prices in a given currency paid for medical supplies, price charged for a clinical service).
• Economic or opportunity cost. Reflects the value of benefits forgone by using resources to provide alternate products or services (e.g., the value of employee’s time engaged in work outside primary job duties); economic or opportunity costs may be a way of attributing a monetary cost to goods and services.
• “Accounting” types of cost. These costs are applied to reflect the real value of a product or service at a given time; the cost may actually not be incurred (e.g., depreciation allowance for medical equipment).
• “Shadow” prices. Applied to goods and services whose true value is not the same as listed (e.g., value of donated equipment, the time of volunteer staff).

Generally, you can expect to find three major categories of costs:

• costs related to people and their time (personnel)
• costs of equipment or capital (machine)
• cost of resources that are frequently replenished (materials and supplies).