Here is your brief note on accounting costs and economic costs

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Accounting costs refer to those costs that are paid by the entrepreneur while hiring the factors of production from outside. He has to pay rent for the hired land and building, wages to the laborers employed and interest on capital borrowed. All these cash payments are included in his cost of production. The accountant maintains a record of these costs for estimating the total cost of the firm. These payments are made to outside parties on contractual basis. Hence, these accounting costs are also known as explicit costs.

Economic costs include both accounting costs and implicit costs. An entrepreneur may use his own factors such as land, building, capital, labor etc. in his own firm. Instead of using these factors in his own firm, if he would give to others he must earn some income. Sum-total of the imputed values of rent of entrepreneur’s own building, wages of his own labor and interest of his own capital used in his own firm is known as implicit cost. Hence, economic costs =According costs (or explicit costs) + Implicit costs. In other words, economic costs include both implicit costs and explicit costs.

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