Cash Cost vs. Marginal Cost

In business, there are various categories of costs. The different ways of taking costs into account help a business determine whether its costs are reasonable, whether it can reduce its costs and what level of production or sales would be most profitable for the company. Cash cost and marginal cost refer to two different aspects of costs.

Cash

A cash cost refers to a transaction in which the business pays out cash. A marginal cost, on the other hand, has no relation to whether cash has changed hands. When a business states that it has a marginal cost of a certain amount of dollars, it may or may not have actually paid out the money. It is possible, for example, for the business to have incurred the cost, but not have paid for it.

Accounting Method

Accountants can choose to either use the accrual or cash method of accounting. With cash accounting, all the costs shown in the company's financial statements are cash costs. On the other hand, the costs on the financial statements of a company using the accrual method may not be cash costs. With the accrual method, the company recognizes costs at the time the business incurs them, not at the time the business pays them.

Number of Units

Marginal cost relates to the number of units the business produces or sells. It indicates the amount of money the company has to spend to produce or sell one more unit of product or service. Marginal cost usually varies depending on the level of production or sales. For example, a company may have to pay $2,000 for a truck to deliver 20 boxes of products. If the company needs to deliver 21 boxes, it may need to hire a bigger truck. This increases its marginal cost by the amount the bigger truck cost exceeds the smaller truck cost. On the other hand, the number of units does not affect cash cost.

Financial Statements

A company's financial statements would show its cash costs if it uses the cash method of accounting. If the company uses the accrual method of accounting, the income statement or the profit-and-loss statement would show its cash costs. On the other hand, financial statements don't show the company's marginal costs. This is because marginal costs are produced for internal use of the company. The management uses the concept of marginal costs to plan the appropriate production or sales level.

References

• University of Wisconsin Extension; Cost of Production; May 2011
• University of South Carolina; Marginal Cost and the Output Rate Under Competition; Samuel L. Baker
• University of South Carolina; Cost Concepts; Samuel L. Baker
• College of San Mateo; The Statement of Cash Flows; Rosemary Nurre