There are costs attached to producing and delivering goods or services, planning and executing projects and programs, or pursuing any other economic and business activities or initiatives. The profitability of any of these initiatives is anticipated by comparing target income against estimated costs. This is where costing and valuation become applicable.
Explaining the Difference Between Costing and Valuation
It is true that costs are considered as consequences of business activities. Managers and financiers take measures to reduce the costs of a particular initiative. It is also true that they are not undesirable at all times. It is for this reason that an appreciation of costs requires an understanding of the difference between costing and valuation.
Definitions and Purpose
Costing is the process of determining the costs of the needed resources of a particular initiative through a cost estimation methodology. It is simply about assigning costs to a particular activity. Valuation, on the other hand, is defined as the process of determining the worth or value of something through the same process of estimation.
Furthermore, to understand further the difference between costing and valuation, take note that the main purpose of costing is to simply determine the resource requirements of a particular initiative. The goal of valuation is more complex. It is undertaken to weigh desirable outcomes or consequences against undesirable ones.
It is also worth noting that costing focuses on the monetary resources used to acquire or create something. It is about the bottom line. Valuation is about the perceived worth of something. It considers not only the costs but also the potential benefits and usefulness of an initiative. It looks at what someone is willing to pay for something.
Additional Explanations
Costing is purely quantitative because it merely involves determining monetary amounts. Valuation can be a mix of quantitative and qualitative approaches that involves determining monetary amounts, using indicators for effective and efficient use of resources, and comparing different options based on predefined metrics.
Valuation is relatively more important than cost because it involves identifying choices and weighing different consequences for each available choice in order to determine which among such choices is worth pursuing. It also helps in determining potential gains and probable opportunity costs that tag along with each choice.
Understanding the difference between the two can help in rationalizing business decisions. Results from costing can help itemize expenditures and provide an overview of the total costs of a particular initiative. Results from valuation, on the other hand, can help weigh the pros and cons of each choice, thus allowing informed decision-making.
