## What is Cost?

Cost means the resources sacrificed for the purpose of carrying on a business or profession, which can be quantified in monetary terms.

### The three key ingredients

Every valid "cost" must satisfy all three of the following tests. Read the definition slowly and notice that each phrase is doing work:

#	Key term	What it means
1	Sacrifice of Resources	Something of value (cash, material, time, an asset) is given up.
2	Relating to Business / Profession	The sacrifice must be connected to running the business or profession — not a personal or unrelated outflow.
3	Quantifiable in Monetary Terms	The sacrifice must be measurable in money. If it cannot be expressed in ₹, it is not recorded as a cost.

### Why this definition matters

The whole subject of Cost & Management Accounting is built on identifying, measuring, classifying and controlling costs. If a sacrifice fails even one of the three tests above, it does not enter the costing system. Anchor every later concept (cost sheet, overheads, marginal cost, standard cost) back to this base definition.

Worked example

### Example 1

Applying the 3-test rule:

Wages paid to a factory worker → sacrifice of cash (✔), relates to business (✔), measurable in ₹ (✔) ⇒ a cost.
The owner's personal car EMI → relates to personal use, not business ⇒ not a business cost.
Loss of customer goodwill after a delay → a real sacrifice and business-related, but not reliably quantifiable in money ⇒ generally not recorded as a cost in the costing system.

⚠️ Common exam mistakes

Treating every cash outflow as a 'cost' — personal or non-business outflows fail the 'relating to business/profession' test.
Forgetting the 'quantifiable in monetary terms' test, and trying to book non-measurable sacrifices (e.g. lost goodwill) as costs.
Confusing 'cost' (resource sacrificed) with 'expense' (an expired cost charged against revenue) right from the start.

Reference:

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Meaning of Cost

Worked example

⚠️ Common exam mistakes