Actual cost

Actual cost (value) is an accounting term that means the amount that was paid to buy a product (that is, the cost of the product based on the cost of materials, labor required to produce it and the costs to deliver) or an asset. This value can be the historical, past or current value of the product.

Actual Cost in project management

Is the total cost, to-date, spent on the finished project work:

• Overview of actual cost in project management. Contrary to the type of organization, projects are still expensive to implement. The cost of the project varies depending on the mustu factors, e.g. deadlines, project size, capabilities, complexity, human and physical resources. Usually, as a project manager, your responsibilities include budgeting, keeping an eye on project expenditure against the budget, and taking into account periodic reports of actual project costs.
• Definition of actual cost in project management. The Knowledge Base of the Project Management Body (PMBOK guide) defines the actual cost as any work done by you and your team in the project, as well as all costs (direct and indirect) incurred for the project in a given period.
• Formula of actual cost in project management. The formula for real cost is: real cost = sunken costs + indirect costs + fixed costs + direct costs + variable costs. As you can see, the actual cost consists of several types of project costs, which are:

1. Sunk costs: the costs have been incurred, there is always a very high probability of errors and mistakes as well as mistakes or changes in scope during. However, this cost should be taken into account in the total final cost of the project.
2. Direct costs: the costs directly related to your projects are obvious and generally easy to verify; fixed and variable costs are examples of direct costs.
3. Variable costs: costs that change during the project, for example, hours for the project designer may be higher at the beginning of the project, and then the architect may collapse, the project during the project.
4. Fixed costs: costs that are unchanged throughout the project, such as the cost of renting equipment.
5. Indirect costs: costs related to the implementation of projects are usually calculated and are not as light to sum up as administrative services.

Example

"For example, a financial organization decided to develop a risk management software to monitor stock trades for all stocks trading on the American Stock Exchange; the estimated project duration was 10 months. In the 3rd month, the client learned the software included monitoring the S&P 500 Exchange, based on an assumption made by one of the developers, and the client requested the project manager to remove the S&P 500 Exchange, because it was out of scope (that is, it was not included in the original scope). At the end of the 4th month, the project sponsor requested to know the actual cost of the project." Below is the actual cost of the project as of the end of the 4th month:

• Variable Costs (project teams' hours -$1000) + Indirect Costs (utilities expense - $2500) + Fixed Costs(computer server rental and monthly cloud rental free - $3500) + Direct Costs (monthly software license free - $5000) + Sunken Costs (S&P 500 Exchange/unauthorized scope change - $9000) = Actual Cost (at the end of the 4-th month - $21000).

Advantages of Actual cost

Actual cost is an important concept in accounting, as it allows businesses to accurately track and measure their expenditures. Actual cost provides a reliable tool for making informed decisions about future purchases and investments. Some of the key advantages of using actual cost include:

• Accurate and reliable data: Actual cost provides a more accurate and reliable method of tracking expenses, which allows businesses to make more informed decisions.
• Cost comparison: Actual cost provides a more comprehensive view of expenses, allowing businesses to easily compare costs across different products or services.
• Improved budgeting: When businesses use actual cost, they can create more accurate budgets and ensure that their spending is within budget.
• Increased efficiency: By tracking actual cost, businesses can identify areas of waste and inefficiency, and make changes to increase efficiency.
• Easier decision-making: Actual cost provides businesses with a more detailed view of their expenditures, which makes it easier to make decisions about future purchases and investments.

Limitations of Actual cost

Actual cost can be a useful measure of the value of a product or asset, but it has several limitations. These include:

• The actual cost may not reflect the true value of an asset or product due to inflation and market conditions.
• It does not take into consideration the potential future value of the product or asset, which may be greater or lesser than the actual cost.
• It does not take into account the cost of ownership, such as maintenance, taxes, and insurance.
• It does not reflect the quality of the product or asset, which can be difficult to measure.
• It does not consider the intangible value of a product, such as brand recognition or customer loyalty.

Other approaches related to Actual cost

Other approaches related to Actual cost include:

• Opportunity Cost - This is the cost of not being able to pursue the next-best alternative when a particular course of action is chosen.
• Implicit Cost - This is the cost of not monetizing an asset that could be leveraged for financial gain.
• Sunk Cost - This is the cost of an investment that has already been made and cannot be recovered.
• Variable Cost - This is the cost that changes as the quantity of output changes.
• Fixed Cost - This is the cost that remains constant regardless of the quantity of output.

In summary, actual cost is the amount paid to buy a product or asset and other approaches related to actual cost include opportunity cost, implicit cost, sunk cost, variable cost, and fixed cost.

Footnotes

Actual cost — recommended articles

Cost model — Applied overhead — Allocated cost — Differential cost — Cost per unit — Irrelevant cost — Normal cost — Product cost — Differential costing — Importance of technology

References

• Barrat C., Chapman A., (2004), Actual Costs.
• Crosson S., Needles B., (2011), Managerial Accouting, South-Western, Cengage Learning, Inc, Manson.
• Drury C., (2008), Management and Cost Accounting, Uniwersyti of Huddersfield, Huddersfield.
• General Services Administration, (2019), Federal Acquisition Regulation
• Harrison L. F., Lock D., (2004), Advanced Project Management: A Structured Approach, IML Typographers, Cornwell.

Author: Andrii Poliman