Out-of-pocket costs are those costs or expenses that require a cash payment in the current period or during a project.
For example, the wages of the person setting up a machine for a new production run are an out-of-pocket cost. However, the cost of the lost opportunity to be producing profitable output during the setup time is not an out-of-pocket cost. (The cost of not earning profits during the setup time, known as an opportunity cost, is often far greater than the out-of-pocket costs.)
Another example of out-of-pocket costs are the current year’s repairs and maintenance expenses on a church that was constructed 15 years ago. However, the current depreciation expense on the church is not an out-of-pocket cost. The current period’s depreciation is also referred to as a noncash expense.