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What are out-of-pocket costs?

Author:
Harold Averkamp, CPA, MBA

Out-of-pocket costs are those costs or expenses that require a cash payment in the current period or during a project.

For example, the wages of the person setting up a machine for a new production run are an out-of-pocket cost. However, the cost of the lost opportunity to be producing profitable output during the setup time is not an out-of-pocket cost. (The cost of not earning profits during the setup time, known as an opportunity cost, is often far greater than the out-of-pocket costs.)

Another example of out-of-pocket costs are the current year’s repairs and maintenance expenses on a church that was constructed 15 years ago. However, the current depreciation expense on the church is not an out-of-pocket cost. The current period’s depreciation is also referred to as a noncash expense.

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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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