![]() Private cost for a firm’s or an individual of a good, service, or activity include the cost the firm or the individual has to pay to acquire equipment, labor, and buy materials or other inputs. From the social point of view, the concept of real cost is very important but it involves the problem of subjectivity and value judgment. Different production processes involve different levels of real cost. On the other hand, Real cost considers all the physical discomforts, pain, trouble, sacrifice, abstinence involved in the production of a commodity. It reflects the aggregate expenditure borne by a firm on the purchase of raw materials and other inputs essential for the process of production. Money cost refers to the cost of production expressed in terms of monetary units. The chief dissimilarity between accounting and economic costs is the inclusion of opportunity costs as a part of economic costs. The historic cost of an activity is the sum of the costs the firm actually attributes to providing that activity in a given accounting period. Historic cost is an accounting cost measure. Accounting costs are the costs that appear on the income statement. These costs include direct payments to factors like labor and capital to produce output. Nitin is not charged as the explicit cost of his own business.Īccounting costs are the costs most often associated with the costs of producing. It is considered implicit because the income foregone by Mr. This loss of salary is an implicit cost of Mr. If he decides to set up his own business, he foregoes his salary as a manager. Nitin used to work as a manager in some firm on a salary. Implicit cost is also known as imputed cost. Implicit cost arises in a situation when the factors of production are possessed and supplied by the firm itself or by the entrepreneur in such a case there is no cash outlays. Therefore, explicit cost is also referred to as accounting cost. An accountant takes into consideration this cost. An accountant takes into account the payments made by a firm to the outside suppliers of various productive factors. This cost has the characteristics of contractual payments and includes the rent, wages, and interest, payment for raw materials, energy, insurance premium, transportation cost, advertisement, and taxes. Explicit Cost:Įxplicit cost refers to the contractual cash payments made by the firm for purchasing or hiring the services of various productive factors which are not own by him. The opportunity cost is the next best alternative use foregone.Įxample- For a farmer choosing to plant rice, the opportunity cost would be any other crop he may have planted, like wheat. When a firm opts for the best of alternatives, it foregoes the returns expected from other alternative uses. A firm, in order to maximize its level of profit will always endeavour to choose the best from the alternative uses available. Opportunity cost, also referred to as Alternative cost occurs due to the scarcity of resources and the alternative ways that we utilize the resources. It reflects the returns that we have given up to select the present (best) use of the factor. Opportunity cost indicates what a factor could have earned in the next best use. In other words, opportunity cost of any resources is the expected returns from the next best alternative use of their best present use. Opportunity cost of any input is the next best alternative use that is sacrificed by its current/ present use. Actual costs are generally recorded in the books of accounts. Actual wages, rent or interest paid are some examples of absolute cost. It involves all the expenditure actually incurred by the firm to procure labour, material, machinery, equipments, energy, transport, etc. It refers to the actual expenditure incurred by the firm for producing good and service.
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