If you’ve ever signed a contract and wondered if the shown price reflected what you actually pay, you’re familiar with “other costs.” For example…
- When you purchase a home, sometimes you’re charged strange processing, notary, and transfer fees.
- When you buy a car, you might find out that there’s a title transfer fee that wasn’t disclosed.
- When you purchase stock through a broker, you might hear after the fact that you need to pay management and administrative fees.
These are all commonplace “other costs”– i.e fees that don’t fit into primary cost categories, but must be paid nevertheless.
Other costs exist as much for companies as they do for individuals. When you look at a P&L (aka income statement), for example, you’ll almost always see “other costs” as a line item.
This article defines other costs, provides examples in life and in business, establishes a formula, and explores several nuances.
Definition
Other costs, also known as other expenses, are isolated or recurring costs that don’t fit into primary cost categories but must be paid nevertheless, such as closing costs on the purchase of a home or travel expenses for a company.
In business, other costs usually don’t include large one-off items, which should in most cases be listed as independent lines for the sake of reporting. For example, travel and consulting expenses can be considered other costs, but a large expense due to a lost lawsuit should usually be shown as a separate line.
Other Costs When Buying a Home (with Sample Calculator)
Most of this article focuses on other costs and expenses in business, but it is useful to look at ways you might see other costs in everyday life, such as buying a home.
When buying a home, other costs to consider include:
| Other Cost | Description | Initial vs Recurring | Cost in Below Example | Calculation |
|---|---|---|---|---|
| Application fee | Application for the loan | Initial | $ 150 | Average |
| Appraisal fee | Fee for someone to value the home | Initial | $ 450 | Average |
| Credit check fee | Payment to check your credit score | Initial | $ 60 | Average |
| Origination and/or underwriting fees | Payment to the banks underwriter to evaluate terms of the loan | Initial | $ 650 | Average |
| Title search fee | Fee to search for and verify the title of the home | Initial | $ 500 | Average |
| Transfer tax | Taxes paid to transfer the title under your name | Initial | $ 5,000 | 1% of purchase price |
| Property tax | Taxes on the ownership of the property | Recurring | $ 50,000 | 1% of purchase price paid yearly over 10 years |
| Homeowners insurance | Insurance to protect your from damages | Recurring | $ 1,128 | Average |
| Private mortgage insurance | Insurance you pay to protect the lender in case you default | Recurring | $ 16,617 | 1.22% paid on outstanding loan balance |
| Title insurance | Insurance to protect your against claims of the title (i.e some unknown heir claims ownership) | Recurring | $ 3,750 | 0.75% paid on purchase price over 10 years |
| HOA Fees | Fees you pay to maintain the neighborhood or complex where the home is located (cutting the grass, keeping watch) | Recurring | $ 30,000 | Average |
I’ve built a sample financial model of a home valued at $500,000, of which $100,000 is settled in a down payment and $400,000 is paid with a loan over 10 years. You can download the Excel document I made here:
Download the Sample Calculator Here
Here’s what the model looks like (snippet 1st year):
You can generally think of the cost of buying a home as the sum of the purchase price, interest paid on a loan to fund the purchase, other initial costs, and other costs. With a yearly interest rate of 4% on a ten year loan, the purchase price in our example would be $500,000, the interest paid would be $86,684, other initial costs would be $6,810, and other costs would be $101,494.
This totals to $694,989. In other words, you would pay $194,989 on top of the home value.1
Now that we’ve looked at a detailed example of other costs in “normal life,” let’s look at some nuances surrounding other costs in business.
Other Expenses Synonym for Other Costs
Other expenses are often used synonymously with other costs, but they are not exactly the same. In practice, you can mix the two, but the next section explains the formal difference.
Other Costs vs Other Expenses
There’s a good reason costs and expenses are used interchangeably: there is no official difference between them in the Financial Accounting Standards Board glossary.
However, in truth the difference is important. Costs are typically related to the purchase of assets that are used to generate a company’s core revenue, such as inventory and long term assets, whereas expenses usually relate to items that are immediately consumed, such as utilities and professional services.
Other costs vs other expenses are extensions of this idea. Other costs typically consist of fees added to the purchase of inventory and long term assets, such as payment processor fees for e-commerce platforms, whereas other expenses are simply those that don’t fall under major operating expense lines, such as travel and consulting.
Other Expenses Formula
The formula for other expenses is derived from the income statement profit formula, which is Profit = Revenue + Other Income – Costs of Goods Sold – Operating Expenses – Other Expenses – Depreciation & Amortization – Interest Expense, where other expenses are not a subcategory go operating expenses.
We can thus derive that Operating Expenses = Revenue – Profit + Other Income – Costs of Goods Sold – Operating Expenses – Depreciation & Amortization – Interest Expense, where other expenses are not a subcategory of operating expenses.
Other Expenses in Accounting (Journal Entries)
The accounting treatment for other expenses is simple as far as journal entries go. Since these are usually costs wholly incurred within the period, the entries are debit [other expenses] and credit [accounts payable]. When the payment is made, the entry is debit [accounts payable] and credit [cash].
Other Costs in Accounting (Journal Entries)
Since other costs are typically related to core operations, the matching principle of accounting applies. The matching principle simply states that costs directly related to income generation must be booked on the P&L in the same period as the related revenue.
Using the example of payment processing other costs, which are directly linked to purchases made on e-commerce websites, we can write the journal entries as such:
When the processing fee is incurred but the good is not yet delivered, debit [deferred processing fees] and credit [cash].
When the good is delivered (and revenue is recognized), debit [other expense] and credit [deferred processing fees].
List of Examples
There is no definitive list of other costs. Moreover, some items will be classified “other” under the business model of one company, yet under another will be classified as a normal category.
The methodology used to develop this list consisted of consulting a number of 10-K filings for major companies trading on US markets. I looked at other expenses and costs for these companies to extract a sample. The list is delineated below.
However, many of these items are related to financial instruments, so I supplemented the list with additional elements that I’ve seen in private companies. Here’s the list:
| Other Cost/Expense | Description | Company |
|---|---|---|
| Lodging Taxes | Taxes paid on use of rental room such as a hotel | Private company |
| Nonessential Telephone Charges | Phone fees for employees where the phone is not used to make revenue | Private company |
| Clothing/uniforms | Cost of clothing employees for the job | Private company |
| Subscriptions | Subscriptions of industry magazines | Private company |
| Tools and supplies | When not related to core activities | Private company |
| Recruiting costs | Self explanatory | Private company |
| Accounting and legal fees | Self explanatory | Private company |
| Legal settlements | Settlements on cases not related to core activities, i.e not a law firm | Merkel |
| Startup costs in new legal entities | New entities are immaterial compared to the size of the company | Merkel |
| Rental expenses | Self explanatory | Merkel |
| Run-off expenses | When debtors pay off loans early and recognized interest income is lost | Merkel |
| Depreciation in subsidiary companies | When subsidiaries are immaterial | Merkel |
| Debt discounts | When debt returns have been recognized, the discount on expected returns | Bioxytran |
| Interest expense | When immaterial, either because it belongs to immaterial subsidiaries or because it’s a one-off | Salesforce |
| Finance leases | Company buys an asset and leases it to another, transferring risk/reward | Salesforce |
| Operating leases | Company buys an asset and leases it to another, NOT transferring risk/reward | Salesforce |
| Investment income offsets | Company uses income to offset related costs within the expense account | Salesforce |
| Foreign currency derivative gains/losses | Company includes P&L side of FX instruments under other expense | Salesforce |
| Impairement charges | Decreasing the value of an asset | Nike |
| Pension & Benefits mark-to-market adjustments | Non-cash adjustments to pensions if the market value has changed | Verizon |
| Reorganizational expenses | Cost to adjust to external events such as COVID | MMM |
| Deconsolidation of subsidiaries | Removing a company from the group | MMM |
| Retirement benefits | Voluntary retirement executions | MMM |
Other Income/(Expense)
If you look at official public company filings with the SEC, you will often see other expenses grouped together in a line with other income. This is common practice for multinational companies whose financial information must be reduced and summarized from a large data starting point.
It’s easier, and generally produces no negative effects, to group and net non-essential income and expenses on one line.
Other Expenses & Costs on the Profit & Loss Statement
Since other expenses are part of a company’s profitability, the expenses are booked on the P&L when they are incurred, or when the related revenue is earned in the case of other costs.
Other Expenses & Costs on the Balance Sheet
Other expenses only hit the balance sheet as payables, after which point they are paid as cash. Other costs, however, can be booked as deferred charges vs payables until they are incurred according to the matching principle. Once incurred, they’re booked as an expense.
Other Direct Costs & Other Costs of Goods Sold
Other direct costs typically consist of one-off payments that relate to a specific contract in a service company. For example, imagine there is a large development cost associated with delivering and installing an intensive IT software program for a client.
While it’s part of a core service, it should not be grouped in with all direct costs because similar amounts won’t occur on other contracts — it’s a one off.
Conclusion
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- This example is intended for educational purposes only and should not be used as a home price tool. Always consult a professional before investing your money. [↩]
