Definition: The Out-of-Pocket Cost involves the potential future cash payments or cash transfers both recurring and non-recurring, paid during the current accounting period or during the project. In other words, the out-of-pocket cost involves the direct monetary payment for the work done during the project.
It is an explicit cost paid in the form of wages, rent, cost of material, labor, commission, salaries, interest, transportation and electricity expenses. Only those expenses which are payable in cash during the current accounting period constitutes the out-of-pocket cost while the expenses which do not require any direct spending of cash do not form a part of this cost. Such as depreciation, interest, etc.
For example, the wage paid to the labor for cleaning the machinery and equipment is out of pocket cost while the opportunity lost of generating output during the cleaning time is not the out of pocket cost rather it is an opportunity cost. Often the opportunity cost is much greater than the out-of-pocket cost.
Leave a Reply