ACCOUNTING COSTS, ECONOMIC COSTS AND PROFITS
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COST
The total expenditure incurred in the production of a commodity is called cost.
It is constituted of explicit and implicit costs.
Explicit cost is the actual expenditure incurred on inputs or payment made to outsiders for hiring their factor services. For example, wages paid to the employee, rent paid for hired premises, payment for raw materials etc.
Implicit cost is the estimated value of inputs supplied by the supplied by the owner himself. For example, rent on own land, salary for the services of the entrepreneur etc.
Implicit cost is calculated as the opportunity cost of the input. Opportunity cost is the cost of the next best alternative forgone. The cost of a specific commodity, is the value of the alternative commodity which is not produced.
For example: A farmer can produce either 80 kilograms of rice or 100 kilograms of wheat on his land with the given resources. If he chooses to produce wheat, he will give up 80 kilograms of rice, which is the opportunity cost for wheat.
Therefore, cost consists of the actual expenditure on inputs (explicit) and the imputed value of the inputs supplied by the owners (implicit).
For example: A farmer cultivates his own land to produce wheat. The explicit cost would include expenditure on seeds, fertilizers, tractors. The implicit cost includes the rent on the piece of self-owned land and payment for his services.
ECONOMIC COST AND ACCOUNTING COST
Economic cost consists of both the explicit and implicit costs. Economic costs are not typically recorded in the accounting books of companies. Economic costs are usually considered when a company must make a strategic decision involving opportunity.
For instance, if a company wants to close an operating location and rent it out to another business, the company must consider the economic cost of