Cost and price are often used interchangeably, although the two words mean something different when it comes to accounting and financial statements. When conducting financial analysis or making investment decisions, it's important to understand the difference between cost and price and how they impact a company's financi▨al profile.

Cost vs. Price

Cost is typically the expense incurred for creating a product or service a company sells. The 澳洲幸运5官方开奖结果体彩网:cost to manufacture a product might include the cost of raw materials used. Other expenses might also be factored in, including🌳 wages, utility bills, mark♒eting, and distribution.

The amount of cost that goes into producing a product can directly impact its price and profit🌠 earned from each sale. Price is the amount expected or required to purchase a product or service. It is what an item sells for.

The difference be⛎tween the price paid and costs incurred is profit. If a customer pays $10 for a product that costs $6 to makeꦫ and sell, the company earns $4 in profit.

Cost

Companies record their costs of doing business in their 澳洲幸运5官方开奖结果体彩网:income statement. Usually, costs are separately identified as either direct or indireꦅct.

Some companies will list the cost to make a product under 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS). Also referred to as cost of sales, COGS is the 🧸total of direct costsꦑ involved in production.

Direct costs are expenses directly tied to the production of the products, such as any raw materials used and the 澳洲幸运5官方开奖结果体彩网:cost of labor. Indirect expenses, such as distribution costs and sales force costs, are not factored into COGS. In other words, COGS specificaꦑlly tells us the cost of acquiring or manufacturing the products or finished goods a company sells.

Further down in the income statement, companies also reveal their 澳洲幸运5官方开奖结果体彩网:operating expenses🍸. These are expenses not directly tied to the production o⛦f goods or services. 

Examples of operating expenses include:

• Rent
• Utilities
• Legal costs
• Sales and marketing
• Payroll
• Insurance
• Research and development

Price

The appropriate price of a product or service is based on supply and demand. The two opposing forces are always trying to achieve 澳洲幸运5官方开奖结果体彩网:equilibrium, whereby the quantity of goods or services provided matches the market demand an🍸d its ability to acquire the goods or service. The concept all♚ows for price adjustments as market conditions change.

For example, suppose that market forces determine a widget costs $5. A widget buyer is, therefore, willing to forꦬgo the utility in $5 to possess the widget, and the widget seller perceives $5 as a fair price for the widget. This simple theory of determining prices is one of the core principles underlying economic theory.

Supply is the number of products or services the market can provide, including tangible goods (such as automobiles) or intangible goods (such as the ability to make an appointment with a skilled service provider). In each example, supply is finite—there are onl🦋y a certain number of automobiles and appointments available at any given time.

Demand is the market's desire for the item, tangible or intangible. The number of potential consumers available is always finite as well. Demand may fluctuate depending on a variety of factors, such as an item's ꧂perceived value, or affordℱability, by the consumer market.

The Bottom Line

Though similar in everyday language, cost and price are two different but related terms. The cost of a product or service is the monetary outlay incurred to create a product or service, whereas the price, determined by supply and demand in a 澳洲幸运5官方开奖结果体彩网:free market, is what aওn individual ཧis willing to pay and a seller is willing to sell for a product or service.