Posted in Finance, Accounting and Economics Terms, Total Reads: 223
Definition: Friction Cost
Friction cost is the fee, cost or price related to a business deal, which can be stated, non-stated, implied or direct. It may include various costs like taxes, time, effort, R&D expenses, amount accumulated over time and similar other items. It simply refers to the different costs incurred to complete a transaction.
An example of friction cost can be that: while purchasing a currency other charges are also included in that. The total summation of all the charges will give us the friction cost. Friction cost is also known as the transaction cost. Before undertaking any transaction, a person should know how the transaction is will take place and what all charges are included in a transaction. Before knowing this, a person shouldn’t go for a transaction if he doesn’t have the whole idea of the transaction in which he is going to indulge.
We can also take the example of buying a car. The transaction cost associated with buying a car isn’t only the cost of the car but also the various other costs associated with it. For example attaching different accessories, getting it insured and similar other things. All these come under transaction costs.
The friction cost not only includes the monetary costs associated with a transaction but also the time and effort undertaken to complete a transaction. A lot of physical and manual effort is put in to complete a particular task and that should also be taken into account.