Intangible Cost

What Is an Intangible Cost?

An intangible cost is an unquantifiable cost emanating from an identifiable source that can impact, usually negatively, overall company performance. Many intangible costs arise from causes that are social, legal, or political, and ignoring them can have adverse implications.

Intangible costs may be contrasted with tangible costs, which are both identifiable and quantifiable. They may also be contrasted with intangible assets, which are benefits that similarly cannot be directly measured.

Understanding an Intangible Cost

An intangible cost basically consists of placing a subjective value on a circumstance or event in an attempt to quantify its impact. These expenses are triggered by a real, identifiable source, yet putting a number on them is often no easy task.

Intangible costs can be triggered by a variety of occurrences, including losses in productivity, an impairment to goodwill, decline in employee morale, loss of brand value, or damage to brand equity. These types of setbacks do not have a concrete value, although managers will often attempt to estimate the impact of them anyway as they can have a very real effect on productivity and, subsequently, a company's bottom line.

Intangible costs are difficult to measure but must not be overlooked as they can have a significantly adverse impact on profitability.

Intangible Costs vs. Tangible Costs

Tangible costs are often associated with items that also have related intangible costs. A tangible cost is the money paid to a new employee to replace an old one. An intangible cost, on the other hand, is the knowledge the old employee takes with them when they leave.

When conducting a cost-benefit analysis, company executives estimate both the tangible and intangible costs before moving forward with changes or a new direction. The tangible costs factor heavily in making decisions involving large fixed assets, such as production machinery or a new factory. Underestimating these costs can lead to lower profits, while overestimating them might lead to avoiding a potentially lucrative avenue.

Examples of Intangible Costs

A widget company decides to cut back on $100,000 in employee benefits to maximize profits. When news reaches the employees of the cut-back, worker morale will likely drop, leading to a decline in productivity and lower revenues. The employee's focus on losing benefits instead of making products represents an intangible cost, which may be larger than the gains realized by reducing employee benefits.

Let's look at another example. A toy company produces a toy that ends up injuring a portion of the children that play with it. This setback may lead to an increase in tangible costs, such as the expense associated with a recall and money paid to settle lawsuits. However, there are also intangible costs to consider in this scenario, including the likelihood that the company's reputation will take a notable hit from this mishap.