What is the distinction between economic costs and accountin

What is the distinction between economic costs and accounting costs Which are important for calculating the economic profits of the firm?

Solution

1. (a) What is the distinction between economic costs and accounting costs?

Accounting costs occur during normal business operation and are easily identifiable and calculated. Companies experience economic costs that are not reported on ledgers that can affect management decisions. Accounting costs are for both internal and external company reports, whereas economic costs are only applicable for internal accounting reports. Economic costs are associated with resources that are provided to a company that does not have a price tag. For example, if the company runs the show in its own building, it could earn rent by letting it out to another company. Such costs are not usually recorded. These are implicit costs or simply opportunity costs.

Accounting costs have to be taken into account while calculating accounting profit. Accountants are more concerned about the explicit costs. That is, what a company actually pays out to other people In the process of producing a product. So the accounting costs will include the price of the product, the money you spend on advertising, if any, and the amount that it really costs to go around selling your product.

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