Actuals Vs. Estimates

Actual and estimate costs show the difference between prediction and the reality of the costs. Estimated costs are those used to plan for expenses and record transactions beforehand, while actual costs are the result of the actual cost-incurring activity.

The terms actual and estimate are often used in an accounting sense to refer to the prices of assets when they are being bought or sold. In accounting, prices are calculated before and after transactions actually take place, so companies can stay ahead of the game and properly project their gains and losses ahead in time. This helps them make better decisions and, of course, show investors where the companies are heading.

Of the two terms, actual is the most simple to explain. An actual amount is the amount paid for a product or service. When the transaction occurs, this is the money that changes hands, and the amount that is officially recorded in the books as the final price. Nothing can change the actual price--it is always the final number. In contracting, for instance, the actual amount includes all direct labor, materials and miscellaneous charges. Because they are direct and have already been incurred, they are considered actual, set in stone.

The estimate, on the other hand, is a highly flexible number, and has a number of different definitions depending on the circumstances. The classic kind of estimate refers to a price set on a project, especially some type of operation or services. To reach such an estimate, a variety of factors are taken into consideration, including the labor needed to complete the project and the materials involved. This is also sometimes called the "standard cost."

Estimated cost can also refer to the market price of an asset. This is especially true of property, houses and stocks. These items have constantly fluctuating market values based on many different factors. A stock's price might change from moment to moment, while housing prices rise and fall with interest in property and banking loan practices. The problem is that market values do not accurately reflect actual prices. People use a number of formulas to accurately calculate market value and use the results to judge how fair offers are, but that does not mean the market value always wins out. Lower and higher offers are often accepted, which leads to an estimated cost differing from the actual cost.

Companies always prefer that their estimated costs match their actual costs as closely as possible, and a number of accounting methods are used to compare estimated and actual costs month by month, and calculate them closer together. Of course, some factors will always be unpredictable, leading to a slight difference between the two no matter how accurate the data is.