Cost Concept: Accounting and Economic Costs, Implicit and Explicit cost, Fixed and Variable Costs, Total Cost, Marginal Cost and Average Cost

Cost Concept: Accounting and Economic Costs, Implicit and Explicit cost, Fixed and Variable Costs, Total Cost, Marginal Cost and Average Cost: Cost analysis is the study of cost behaviour in relation to numerous production parameters such as scale of operations, pricing of production inputs, output size, and so on. It’s all about the production’s financial elements.

Costs of Accounting and Economics

When a company begins to produce items, it must pay a price for the inputs used in the process. Wages to hired people, pricing for raw supplies, gasoline and electricity utilised, rent for the building he rents, and interest on money borrowed for conducting business are some of these considerations.

These are the expenses that are included in the cost of manufacturing, and they are known as accounting costs. As a result, accounting expenses include all payments and charges made by the company to suppliers of various productive components.

A businessman usually puts money into his company. He might have received a specific interest/dividend if he had put the money in another company. He also devotes time to his business and provides his entrepreneurial and management skills to the company.

He could have given his skills to other businesses for a fee if he hadn’t been engaged in the company. These charges are not included in accounting costs. They are included in the Economic Costs. As a result, economic costs include the following:

The typical rate of return on money invested in a firm by an individual.

The entrepreneur’s wage was not paid, although it might have been if the services had been sold elsewhere.

A bonus for all aspects that the businessman owns and uses in his own company.

As a result, the accounting charges include cash payments made by the company. Economic expenses, on the other hand, include accounting charges as well as the amount of money the businessman might have made with his resources if he hadn’t formed the firm in the first place.

Accounting expenses are also known as Explicit Costs. Implicit Costs, on the other hand, is another term for the costs of elements that a merchant owns. When a businessman’s sales surpass both his explicit and implicit expenses, he makes a profit.

Costs, both implicit and explicit

• Explicit price

Any cost that has already happened but is not disclosed or reported as a distinct item is considered an implicit cost. It is an opportunity cost that develops when a corporation devotes internal resources to a project without receiving any clear reward for doing so. This indicates that when a corporation distributes its resources, it always foregoes the opportunity to gain money from the use of those resources elsewhere, resulting in no financial exchange. Simply put, an implicit cost is incurred when an object is used rather than rented or purchased.

Implicit costs are also known as assumed costs, implied costs, and notional costs. These expenses are difficult to estimate. Because money does not pass hands, organisations do not have to report implicit expenses for accounting reasons

These expenses imply a loss of potential revenue, but not profits. Because these expenses represent potential sources of revenue, a corporation may choose to include them as part of the cost of doing business.

• Explicit Price

Ordinary business expenses that show in the general ledger and have a direct impact on a company’s profitability are known as explicit costs. Explicit costs have monetary values that are clearly stated and pass through to the income statement. Wages, leasing payments, utilities, raw materials, and other direct expenditures are examples of explicit costs.

Explicit costs, also known as accounting costs, are simple to identify and relate to the business activities that the expenditures are attributable to. They are accounted for in a company’s general ledger and pass through to the income statement’s expenditures. The residual revenue that remains after all explicit expenditures have been paid is reflected in a business’s net income (NI). Because they have a direct influence on a company’s bottom line, explicit expenses are the only accounting charges that are required to determine a profit. The explicit-cost measure is particularly useful for long-term strategic planning in businesses.

Cost Concept: Accounting and Economic Costs, Implicit and Explicit cost, Fixed and Variable Costs, Total Cost, Marginal Cost and Average Cost

Costs are divided into two categories: fixed and variable.

Fixed costs, often known as constant costs, are independent of output. To put it another way, they don’t change much with the output. They need a constant outlay of expenditures, regardless of the outcome.

For instance, rent, property taxes, loan interest, and so on. Fixed expenses, on the other hand, may vary depending on the size of the plant and are generally a function of capacity. As a result, we may deduce that fixed costs are unaffected by output volume within a capacity level.

Fixed expenses are unavoidable for businesses, and they apply for as long as the company is open for business. Fixed expenses are sometimes known as unavoidable or uncontrolled costs.

It’s worth noting that certain fixed expenses don’t go away even if the firm is shut down. Costs connected with keeping machinery that the company cannot sell on the market, for example.

Variable costs are cost ideas that are based on the output during the manufacturing process. Variable expenses are proportional to production. Raw material costs, salaries, and so on are examples of variable costs. They may also fluctuate proportionately with the production. These changes, however, are dependent on the use of fixed facilities and resources throughout the manufacturing process.

Total Price

The total cost (TC) is the total economic cost of production in economics. It is made up of both variable and fixed expenses. As part of its fixed or variable costs, total cost is the entire opportunity cost of each item of production.

Costs on the fringes

The change in total cost when the amount produced varies by one unit is known as marginal cost in economics. It’s the price of making one extra unit of a product. All expenses that fluctuate with the degree of output are included in the marginal cost. For instance, if a corporation wants to construct a new plant in order to manufacture more items, the cost of doing so is a marginal cost.

The amount of marginal cost changes depending on the quantity of the product being manufactured. Information asymmetries, positive and negative externalities, transaction costs, and pricing discrimination are all economic variables that influence the marginal cost. Fixed expenses are unrelated to marginal costs. A simple example of determining marginal cost is the $30 cost of producing one pair of shoes. A total of $40 is required to make two pairs of shoes. The second pair of shoes has a marginal cost of $10 to produce.

Average Price

The total cost is divided by the number of things produced to get the average cost. It’s also the same as the total of average variable and fixed expenses. The length of time it takes to produce anything may have an impact on the average cost (increasing production may be expensive or impossible in the short run). Within a market, average costs are the driving force behind supply and demand. Economists look at both the short and long term average costs. The number of items produced has an impact on short-run average costs. The change in amounts utilised for all inputs required for manufacturing is included in the long run average cost.