Accounting Cost and Economic Cost

Accounting Cost includes all such business expenses that are recorded in the book of accounts of a business firm as acceptable business expenses. Such expenses include expenses like Cost of Raw Material, Wages and Salaries, Various Direct and Indirect business Overheads, Depreciation, Taxes etc.

When such business expenses or accounting expenses are deducted from the Sales income of any firm the accounting profit is obtained. Such Accounting/Business expenses or costs are also termed as Explicit Costs.

Accounting Cost: Various allowed business expenses such as Cost of Raw Material, Salaries and Wages, Electricity Bill, Telephone Charges, Various Administrative Expenses, Selling and Distribution Expenses, Production Overhead Expenses, Other Indirect Overhead Expenses etc.

Accounting Profit = Sales Income – Accounting Cost

Economic Cost on the other hand includes all the accounting expenses as well as the Opportunity cost of a business firm. Economic Cost and Economic Profit is thus calculated as follows:

  • Economic Cost = Accounting Cost (Explicit Costs) + Opportunity Cost
  • Economic Profit = Total Revenues – (Accounting Cost + Opportunity Cost)

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By Hassham

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