Difference between Cost and Price

Cost

Cost is typically defined as the total expense incurred by an organisation for the purpose of creating a product or service that they can sell in the market. The final amount includes the factors of production like labour costs and the cost of the raw materials. It also includes the expenses that a firm will incur in marketing, distributing and selling the product to the end consumer or client. Cost is the basis on which a company decides on the profit margin and the final price of a product.

Costing is a very important exercise that a company must conduct with due diligence. Firms are always looking to reduce the costs in order to make sure that they have a decent profit margin which will help grow their business in the long run. There are several different classifications of the price of a product or service like the bid price, the buying price, the selling price and the transaction price.

Price

The price of a product or service is the total that the end customer is willing to pay for it in the market. The price is determined based on some important factors, which are mentioned below:

  • The final cost incurred to make, market and distribute the product
  • The profit margin set by the company
  • The price set by the firm’s competitor for a particular product or service
  • The number of buyers and sellers in the market
  • The demand and supply for that particular product or service
  • The target market profile and their bargaining power

It is important to note that any firm needs to keep a constant eye on the selling price so that the majority of the target customers are willing to buy it. It is the only way to ensure that the organisation can be profitable in the long run. There are several different classifications of the price of a product or service like the variable cost, opportunity cost and fixed cost.

Difference between Cost and Price

Both price and cost are terms we use frequently in the context of revenue from sales. They are also used interchangeably in everyday conversation. But each term takes a separate meaning when it comes to economics or business. There are several areas of difference between cost and price, and we will discuss them in the below table:

Price

Cost

Basic Definition

The price of a product or service is defined as the amount that a customer is willing to pay for it.

The cost of a product or service is defined as the total amount incurred by an organisation to produce and sell it to consumers.

Nature

It is up to the individual organisation to determine the final price at which they are prepared to sell their product or service. The price depends on the cost of making the product or service and the industry regulations governing the market.

The cost of making a product or service depends on the cost of the factors of production (like labour and raw materials) and the expenses incurred in selling it in the market.

Ranking

The price of a product or service is ascertained only after the determination of the final cost.

The cost of a product or service is ascertained before finalising its selling price.

Profit Margin

The price of a product or service includes the profit margin.

The cost of a product or service does not include the profit margin.

Inflow/Outflow of Cash

Price leads to an inflow in cash.

Cost leads to an outflow in cash.

Ascertaining the Amount

The price of a product or service can be ascertained from the perspective of the end consumer or client.

The cost of a product or service can be ascertained from the perspective of the manufacturer or producer.

Classification

The different classifications of the price of a product or service are mentioned below:

  • Bid price
  • Buying price
  • Selling price
  • Transaction price

The different classifications of the cost of a product or service are mentioned below:

  • Variable cost
  • Opportunity cost
  • Fixed cost

Conclusion

It is important to understand that even though there are several areas of difference between the cost and price of a product or service, they both are interdependent. A firm needs to keep a tight leash on the final cost by bringing in efficiencies in the production, distribution, selling and marketing process. Cost is the fulcrum on which both the selling price as well as the sellability of a product or service heavily relies on. Studying these two concepts in detail will help the readers get a better understanding of the pricing mechanism used by firms in fixing the selling price of a product.

Frequently Asked Questions

What are the main advantages of the standard costing system?

The main advantages of the standard costing system are as follows:
  • It helps to promote and measure the efficiencies within an organisation
  • It aids in the control and reduction of the overall costing while making a product or service
  • It is an important tool in the process of fixing the final selling price of a commodity

What are some of the main factors which determine the cost of a product or service?

Some of the main factors that are involved in ascertaining the final cost of a product or service are as follows:

  • The number of vendors present in the market
  • The bargaining power of the firm
  • The demand and supply factors
  • The nature of raw materials that are required to make the final product or service
  • The labour costs

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