Example 1.
In a factory there are three products being manufactured. Production unit of each is separate - occupying 50%, 30% and 20% space respectively. The rent of ₹ 50,000/- per month being paid for the factory is an expense. This amount is then allocated between the three products in proportion to the area occupied - ₹ 25,000/-, ₹ 15,000/- and ₹ 10,000/-. These amounts represent the space cost for each of the products to be used in determining what it costs to produce the product. (Here cost is allocated).
Example 2.
A businessman pays ₹ 1,20,000/- at the beginning of the year as the insurance premium. This is an expense. (Accounting jargon is pre-paid expense). Every month ₹ 10,000/- is charged as insurance premium before arriving at the business profitability. This is the cost of insurance per month. (Cost is derived).