What is Actual Cost?

//What is Actual Cost?
What is Actual Cost? 2017-09-30T05:22:32+00:00

Definition: Actual cost is an accounting term that means the amount of money that was paid to acquire a product or asset. It’s exactly what it sounds like—the actual cost. This cost could be either a historical, past, or present day cost of product. You might be thinking to yourself what other costs are there besides the actual cost of an item.

What Does Actual Cost Mean?

Well keep in mind in managerial accounting, you also have budgeted and forecasted costs. Neither of these costs reflects reality or actual costs most of the time. Management might set a budget to buy a new piece of equipment, but this budget does not always happen. Sometimes companies can get discounts from vendors and other times product prices increase.

Example

Actual cost also applies to manufacturing products as well. The actual cost of manufacturing a product is the total expenditures required to build or manufacture the product. Think of actual cost as the end result of a manufacturing process.

First, a company starts planning the production and forecasts what the expenses will be. Second, the company budgets what it will be able to afford and adjusted to the production levels to meet the budget. If everything goes according to plan, the actual costs will equal the budgeted costs. In the real world, things can go wrong and budgets are not always met. The end result is the actual cost. It could be plus or minus the budgeted or forecasted cost.