The real cost is what a company has actually incurred. That is, it is not a projection or approximation.
In simple terms, the real cost corresponds to expenses already incurred to develop a good or service, accurately reflecting the past.
It should be noted that the real cost cannot be calculated until the end of the production process.
The importance of real costs lies in the fact that, by knowing them, it is possible to set (as far as possible) a selling price close to the optimal one. That way, the firm will be able to maximize profits.
Real cost components
The actual cost mainly includes three components:
- Inputs: Raw material or intermediate products that were subjected to a transformation process to become final goods demanded by the consumer.
- Employed labor: The company must pay its labor for the effort they incurred to produce the good or service.
- Indirect manufacturing costs : These are all those expenses necessary to carry out the operations of a company, but that are not directly related to the manufacturing process or product development. We refer, for example, to water or electricity services or office rent.
It should be noted that there is some labor that can be considered as an indirect cost of manufacture by not participating directly in the production process. This is the case, for example, of employees who carry out administrative work, such as the accounting team.
Actual cost versus estimated cost
The actual cost is calculated after production is complete. On the other hand, the estimated cost corresponds to a forecast made before starting the production process or a certain period of the firm (for example, a new annual exercise), setting an objective.
That is, the actual cost is historical information, while the estimated cost is a projection. Thus, both concepts can be compared to determine if the company has met the proposed goal.