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What is Cost? Define the Original Cost, Replacement Cost, Outlay Cost, Opportunity Cost and Standard Cost?

What is Cost? Define the Original Cost, Replacement Cost, Outlay Cost, Opportunity Cost and Standard Cost?

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1 Answer

A cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In economics, a cost is an alternative that is given up as a result of a decision. In business, the cost may be one of acquisition, in which case the amount of money expanded to acquire is counted as cost.

Original Cost: The original cost involves estimation of the original cost of recruiting, selecting, hiring, training, and developing a firm’s existing human organization. It is both direct as well as indirect. The salary of a trainee can be considered as a direct cost but the time spent and the efforts put throughout training is an indirect cost.

Replacement Cost: The amount that an entity would have to pay, at the present time, to replace any one of its assets. Replacement cost is usually interpreted as the current amount that must be paid to acquire an asset of the same value as a replacement for an asset that is no longer functional or viable.

Outlay Cost: Any concrete costs that can be identified in the past, present or future. These costs do not include forgone profits or benefits. For corporations, outlay costs for new projects will include start-up, production, maintenance and extraneous costs also referred to as explicit costs.

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Opportunity Cost: This means the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you cannot spend the money on something else. If your next best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book.

Standard Cost: Production or operating cost that is carefully predetermined. A standard cost is a target cost that should be attained. The standard cost is compared with the actual cost in order to measure the performance of a given costing department or operation. Variances, which are the differences between actual costs and standard costs, may indicate inefficiencies that have to be investigated. Corrective action may have to be taken.

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July 12, 2019
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