Q:

What is the difference between gross cost and net cost?

A:

Quick Answer

Accounting Tools from CPA Steven Bragg indicates that the gross cost of an item is the sum total of all costs involved in making or acquiring it. In contrast, the net cost is the gross cost minus financial gains derived from the production or acquisition of the item.

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Full Answer

When a manufacturing company acquires raw materials for a project, the gross cost includes the costs of the materials, shipping, taxes and any interest paid. If the materials are less expensive than those acquired from a previous supplier, the savings are subtracted from the gross cost to calculate net cost. The net cost represents the actual economic loss from the purchase. When a business acquires a piece of equipment, the initial sales price, shipping and taxes represent the gross cost. Eventually, if the company sells the equipment for salvage, the gross cost is reduced by the salvage value to compute the net cost, notes Bragg.

The distinction between gross cost and net cost is important when comparing two purchase opportunities. In some cases, one item may have a lower gross cost, but a higher net cost. This scenario may result when the higher cost item leads to efficiency and cost savings, for instance. On occasion, gross cost and net cost are equal because nothing offsets the upfront expenses, according to Bragg.

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