Accounting Cost and Economic cost

Accounting Cost and Economic cost:

Accounting cost or explicit cost:

Accounting costs or explicit costs are the payments prepared by the entrepreneur to the suppliers of different productive factors. The accounting costs are merely those costs that are directly paid out or accounted for by the producer that is, wages to the laborers utilized, prices for the raw materials bought, fuel and power utilized, rent for the building hired for the production work, the rate of interest on borrowed capital and the taxes paid.

Economic cost:

The economic cost comprises not only the explicit cost however also the implicit cost. The money rewards for own services of the entrepreneur and the factors owned by him and used in production are identified as imputed costs or implicit costs. The usual return on money capital spend by the entrepreneur, the salary or wages for his own services and rent of the land and buildings belonging to him and employed in production comprise implicit cost. Consequently,

Economic cost = Explicit cost + Implicit cost.

It might be pointed out that the firm will earn economic gains only when it is making revenue in excess of economic cost.

Economic profit = Total Revenue – Economic Costs.

 

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