What Are Tangible Costs & Intangible Costs?

Businesses are webs of financial and interpersonal relationships, and a conventional accounting system can only imperfectly trace the impact that a particular policy or product has on your bottom line. In addition to the expenditures you directly incur to achieve an outcome such as introducing a new product, your business also may experience changes in its overall worth due to consequences such as damage to employee morale. Tangible costs are direct and obvious expenditures, while intangible costs are less clear and quantifiable.

The products that go directly into producing an item you sell are tangible costs. If your business sells shirts, the cost of fabric depends on the volume you will be producing. The result of this materials expense is clear and tangible; that is, you can see it. However, your business also invests in products with less tangible results. For example, if your sewing machine breaks and you need to replace parts, this investment is more relevant to the overall well-being of your company than to the production expense for a particular product. You must have working equipment in order to make shirts, and the fixed equipment remains part of your business infrastructure even after the shirts are made.

The labor your business dedicates to providing a product or service is considered a tangible cost because the connection between the expenditure and the outcome is simple and linear. However, your business also pays a range of staff to provide services not directly connected with production expenses, such as customer service representatives to answer phones and address customer concerns. These additional employee hours are intangible costs because they are part of the big-picture infrastructure that keeps your business running.

Some intangible costs do not seem to come out of your bottom line at all. If you manufacture a product that hurts a customer, your company may incur tangible costs when hiring a lawyer or compensating victims. However, if you lose business because potential customers hear about the incident on the news, these lost sales are intangible costs you never can accurately measure. Similarly, if your product causes environmental damage that is not immediately apparent, this damage costs society as a whole even though your company may not show any tangible cost incurred on its balance sheet.

Although the difference between tangible and intangible costs is useful in theory for illustrating layers of consequences and separate ways of accounting for costs, the difference is not always clear in practice. Although intangible costs often are defined as expenses that are more general than specific, such as damage done to a company's reputation, the consequences of this damage are real, and they cost real money. In addition, some intangible costs, such as extra customer service attention, may use employee hours that aren't dedicated on paper but still take time and cost money. A business that consistently needs to exercise damage control by adding employee hours soon may see this vague intangible cost morph into a dedicated tangible cost.