Opportunity cost vs accounting cost, When you run a business, you must be aware of the financial factors that influence net profits. Accountants and economists are two such factors. It is difficult to confuse these two terms even though they sound similar, but the term economic costs are significantly different. Both terms refer to explicitly incurred costs, but economic cost methods also take implicit costs into consideration.
Norm
Accounting costs are the costs that show up on the books in monetary form while economic costs include those costs as well as opportunities costs. Explicit costs are considered by both methods, but implicit costs are also factored in.
Components of Accounting Costs
Accounting costs are explicitly defined costs such as those that come out of your business’s bank account. They include costs such as production, lease payments, marketing, and payroll. This is what it actually costs for you to manufacture, market, and deliver your products.
Explicit costs are measurable and can be identified readily on a bookkeeper’s ledger. An accounting cost is a cost that is deducted from revenues during an accounting period.
Components of Economic Costs
Accounting costs use explicit costs when calculating economic costs, but economic costs also include implicit costs. Business assumes implicit costs are those values that are not listed on the ledger, which are associated with utilizing resources. Implicit costs refer to the possibility that a business would make more by utilizing an asset in a more traditional way. Paper companies with tree groves could generate more income if they sold lumber instead of logging the trees.
Cost Method Use
The financial health of a company is determined by the accounting costs. It is crucial as an owner of a business to know what money is coming in and what funding goes to which expenditures. It is for this reason that accounting costs are widely used when determining a company’s financial health. Costs pertaining to accounting are reported in tax returns.
Even today, economic costs are very important to business strategies because they determine long-term plans. The economic costs provide a high-level overview of the value of the company and what the company could be valued at if it changed the way it uses its resources and assets. In the case of entering or exiting markets, or holding existing market patterns, this information could affect strategies. In addition to providing lenders and investors with confidence that a company has real assets that they can leverage for capital, knowing that it has valuable resources is also important to financing.
Advice
Consider speaking with an accountant if you are concerned about the negative impact of opportunity costs on your business, so you can understand how to maximize resources and their value.
Read more:
