What is a tangible cost?
Tangible costs are easily quantifiable costs related to an identifiable source. They are essential to running a business and producing quality products. A company’s tangible costs typically include materials, labor, and space.
Companies use tools like resource management software to track and optimize the human and material resources required for project management. This software helps deliver projects on time and within budget, as well as assisting in comparing resource availability with demand.
Examples of a tangible cost
Different businesses have different tangible costs, but some typical examples include:
- Office equipment
- Employee salaries
- Employee development and training
- Computer software
- Assets like land or factories
Benefits of tangible costs
The expense of tangible costs adds up, so it’s important that these costs are useful. Some benefits that tangible costs provide a company include:
- More accurate accounting: Since tangible costs are easily quantified, it’s simple for a company to manage its financial records. Knowing how much is spent on employee salaries and equipment reduces accounting uncertainty.
- Increased efficiency: By efficiently spending on tangible costs, a company generates more new revenue compared to the cost of spending. Therefore, expenses like materials and employee salaries directly contribute to production.
- Improved projections: Tangible costs provide more certainty than intangible costs, which is beneficial when making projections. When a company needs to make a procedural decision, it’s helpful to plan for specific increases and decreases in spending.
Tangible cost vs. intangible cost
Many business decisions take both tangible and intangible costs into account, as both impact a company’s bottom line.
For example, if an employee were to leave a company, the tangible costs for the company would include:
- Work hours related to candidate sourcing, interviewing, and hiring, and onboarding
- The employee’s unused vacation time
- Time spent training the new employee on tactics, software, and strategy
While it’s tough to quantify intangible costs, they must be identified because they directly affect a company’s overall performance and revenue.
In the new hire situation mentioned above, some intangible costs would include:
- Loss of trust in a company if customers respected and relied on the departed employee for their questions and concerns
- Other employees collectively pitching in to cover all job responsibilities until the new hire is up to speed, leading to a loss of productivity
- A boost or fall in overall employee relations and morale due to a staff member’s departure
- An increase in other employee's following the lead and also leaving the organization
Since intangible costs do not have concrete value, they can be harder to measure. However, doing a cost-benefit analysis can be helpful.
A cost-benefit analysis is a process businesses use to analyze which decisions to make and which ones to pass on. The analysis sums up the potential rewards associated with an action or decision and subtracts the costs of taking that action. In other words, it estimates both the tangible and intangible costs before making a change.
Amanda Hahn-Peters
Amanda Hahn-Peters is a freelance copywriter for G2. Born and raised in Florida, she graduated from Florida State University with a concentration in Mass Media Studies. When she’s not writing, you’ll find Amanda coaching triathletes, cuddling up with a good book, or at the theater catching the latest musical.
