Distinguish between accounting costs and economic costs.

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Economic cost is a more comprehensive idea that accounting costs.  Accounting costs only include what economists call "explicit costs."  These are the amounts that a firm actually pays out to other people in the process of producing their product.  So, if you open a business selling cosmetics from your home, the accounting costs would include things like the price of the cosmetics, the money you spend on advertising, if any, and the amount that it costs you to go around selling your product.

Economic costs include "implicit costs," which are the same as opportunity costs.  In the example mentioned above, the economic costs of starting this business would also include the value of whatever else you could have been doing with your time.  Economic costs would also include, then, the wages that you could have been getting if you had gone to work instead of opening this business.

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thetall's profile pic

thetall | (Level 3) Educator

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The Economic cost is the monetary value of all resources employed in the course of business. It also refers to the opportunity cost of the inputs used in the enterprise. For example, a business that operates from a building it owns forfeits the rent that it would have otherwise received if it rented out the building. In this case, the opportunity cost is the rent forfeited due to business functions. Economic costs also focus predominantly on implicit costs. Implicit costs are costs that the business incurs from the use of owned resources. A monetary value for the resources can be determined, but the resources are not paid for in monetary terms.

Accounting costs, on the other hand, are based on explicit costs incurred by the business. Explicit costs are costs incurred in normal market transactions. For instance, wages paid to workers are an explicit cost. Explicit costs are incurred in the purchase of productive resources.

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gsenviro's profile pic

gsenviro | College Teacher | (Level 1) Educator Emeritus

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Accounting costs account only for the explicit costs incurred in conducting a business and not the implicit costs. The explicit costs include the direct costs to the company, such as employee wages, utility bills (water, electricity, etc.), raw material cost, premises cost, transportation and storage costs, etc. Since these are expenses for which bills or receipts are available, such costs can be objectively verified. In fact, accountants only account for accounting costs in the financial statement of the company. Since these expenses are already incurred, accounting costs are backward looking.

Economic costs, on the other hand, account for both explicit and implicit costs. Implicit costs is the opportunity cost in terms of revenue lost by forgoing the next best alternative, say renting out premises instead of conducting the business there. Implicit costs do not appear on the financial statements and are not objectively verifiable, since there can be a number of alternative to any given course of action. Implicit costs are forward looking, since they include the what if (say, we rented out the premises for next year instead of using it to conduct the business) scenario.

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sciencesolve's profile pic

sciencesolve | Teacher | (Level 3) Educator Emeritus

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The accounting cost reveals the expenses with production, while the economic costs may be evaluated as the total of accounting costs and opportunity costs.

The opportunity cost is associated with every decision or action and it represents the value of a resource that is given in exchange of something else.

The account books do not comprise the opportunity costs but they are emphasized when computing the expenditure required in acquiring an asset.

Hence, the difference between the economic cost and accounting cost is that the economic cost comprises the opportunity cost, while the accounting cost does not.

Although the accounting costs are very important to company owners, the economists are mainly focused on economic costs rather than accounting costs.

The internal and external company reports do include the accounting costs, while the economic costs are only revealed in internal accounting reports.

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