Actual Cost: Everything You Need to Know
In accounting, actual cost means the amount of money that you spent to obtain an asset.3 min read
2. Actual Cost Approach
3. The Meaning of Actual Cost
4. Actual Cost, Manufacturing, and Planning Expenses
5. Actual Cost Example
In accounting, actual cost means the amount of money that you spent to obtain an asset.
Basics of Actual Cost
When you purchase an asset or a product, the total amount of money that you spend on the purchase is your actual cost.
One of the interesting facts about actual cost is that it may not represent the current price of an asset. For instance, actual cost can also mean the past cost of the product or even its historical cost. If you're not familiar with this accounting term, you might wonder if there are any other costs related to a product other than its actual cost.
Actual cost is the total expenditure required to obtain an asset, and can include several different factors:
- The expense invoiced by your supplier.
- The cost to deliver the asset.
- The cost to set up the asset.
- The cost of testing the asset.
In your business's financial statements, an asset's cost will be recorded as a fixed asset. Actual costs of work performed (ACWP) is another way to say actual cost.
Actual Cost Approach
In many cases, businesses use estimates to attempt to determine future costs, which is much different than the actual cost approach. It's actually quite common to combine the actual cost approach and the estimate approach. Blending these approaches allows for the comparison of actual costs to estimated budgeted costs. You can use the variance between these two cost projections to streamline your operations and to make more accurate predictions in the future.
The Meaning of Actual Cost
When discussing managerial accounting, it's important to remember that in addition to actual costs, you will have forecasted costs and budgeted costs. While budgeted costs and forecasted costs are important, they almost never indicate the actual cost of obtaining a product. For example, your company's management may calculate a budget for purchasing a new business asset, but the price you actually pay for this asset likely won't match this budget. When the price of a product increases, it may be possible for your company to receive a discount from a vendor.
Actual Cost, Manufacturing, and Planning Expenses
Actual cost doesn't only apply to purchasing assets. It can also be used for the cost of manufacturing assets.
When you're planning to manufacture a product, you won't know the actual cost until the product has been created. This is because the actual cost of manufacturing reflects all the expenditures needed to create the product, including the cost of raw materials and the price of the manufacturing machinery. There are several steps you will need to complete when you're planning the expense of manufacturing a product. First, you will need to develop a production plan and calculate an estimate of your expenses.
Next, you will need to examine these projected expenses to determine if they will fit into your company's budget. If not, you will need to adjust your production plan to lower your expenses so that they match the budget.
Hopefully, the actual costs of manufacturing will fit into your company's budget. Unfortunately, this is rarely the case, and it can be hard to meet your projected budget. The total you have paid to manufacture your product is the actual cost, and this cost may either be higher or lower than your forecasted or budgeted cost.
Actual Cost Example
Imagine that you have a project that you want completed in no more than a year and that your project has a budget of $100,000. After six months, you've spent $60,000 on your project, which means you have 40 percent of your budget remaining. While examining the progress of your project, you find that it is only 40 percent completed. With these numbers, you can calculate your current actual cost.
Actual cost is always the amount that has currently been spent on a project. So, in the above example, your actual cost would be $60,000, since that's what you have already spent. If the project continues and you spend more money, your actual cost will rise. Notice that the actual cost does not reflect how much of the work is complete, only what the work has cost. You can also use actual cost to calculate two indices: Cost Performance and Cost Variance.
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