Accounting Cost and Economic Costs
Economic costs are also known as Explicit Costs or expenditure Costs. There are the contractual payments made by the employer to those factors of production, which do not belong to the employer himself.
Accounting Costs, The accounting Costs are also known as the imputed costs or the implicit costs or non-expenditure costs. They arise in the case of those factors, which are possessed and supplied by the employer himself. An employer may contribute his own land, his own capital and even may himself work as the manager of the firm. As such he is entitled to receive rent on his land interest on the capital contributed by him and also salary for his work as manager of the firm. All these items should be included in accounting costs and would be payable by the employer to himself. The employer would calculate the on the basis of their alternative or opportunity costs. The depreciation of capital equipment is still another item in accounting costs. It is not contractual payment to be made by the employer to same one, but it is to be credited to the depreciation account by the employer himself.
- Past Costs Vs. Future Costs. Sometimes a distinction is made between actual costs and future costs. Actual costs or historical costs are records of past costs. Future costs on the other hand are based on forecasts. The costs which are relevant for most managerial decision-which are generally forward looking are forecasts of future costs or comparative connectives concerning future income statements, appraisal of capital expenditure, decisions on new projects and on expansion programmers and pricing.
| Box: Calculating Total Cost | ||||
| Number of workers employed | Total output (pairs of running shoes per week) | Fixed cost
(Rs.) |
Variable cost
(Rs.) |
Total cost (Rs.) |
| 0
1 2 3 4 5 6 7 8 9 10 11 12 |
0
7 18 33 46 55 60 63 65 66 66 64 60s |
500
500 500 500 500 500 500 500 500 500 500 500 500 |
0
300 600 900 1,200 1,500 1,800 2,100 2,400 2,700 3,000 3,300 3,600 |
500
800 1,100 1,400 1.700 2,000 2,300 2,600 2,900 3,200 3,500 3,800 4,100 |
| The production of shoes is assumed to depend on only two factors of production: Capital and Labor. Cost of capital is fixed at Rs. 500 per week. Labor can be hired at Rs. 300 per week. Therefore, the variable cost depends on the number of workers employed. Total cost is equal to Fixed cost + variable cost. Total output reflects the law of diminishing returns to labor. | ||||
| Box: The Variable Cost Curve |
| The shape of the variable cost curve reflects the law of diminishing marginal returns. When labor is the only variable input in a plant, variable cost is equal to the number of workers hired per week multiplied by the weekly wage.
|
| Box: The Short Run Total Cost Curve |
| The total cost is the sum of fixed cost and variable cost. Because fixed cost does not vary with output, the shape of the total cost curves reflects the shape of the variable cost curve drawn in the pervious box. |
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