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What is the difference between cost and price?

Author:
Harold Averkamp, CPA, MBA

Definition of Cost and Price

In accounting, the term cost can mean the cash or cash equivalent amount a company paid to acquire an asset or the amount of an expense it incurred. A manufacturer’s product cost is the cost of the product’s materials, labor, and manufacturing overhead. Some manufacturers use standard costs in their accounting system.

The term price is used when referring to the amount that a seller has established for its products. Accountants might state that a product’s selling price is equal to its costs + profit.

However, the terms cost and price are often used interchangeably.

Example of Cost and Price

To illustrate that the terms cost and price might be used interchangeably (even by accountants) we provide the following example…

Best Supply Company sold 10,000 pounds of materials to Mack Manufacturing Co. for $3 per pound. Mack recorded the materials in its Materials Inventory account at its standard cost of $2.80 per pound. The difference between Mack’s actual cost of $3 per pound and Mack’s standard cost per pound of $2.80 times 10,000 pounds is a $2,000 cost variance for Mack. However, accountants refer to this unfavorable cost variance as a materials purchase price variance.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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