Difference Between Accounting Cost And Economic Cost

Difference Between Accounting Cost And Economic Cost

Economic cost is also called opportunity cost and it is the value you give up when you choose one economic activity over the next best economic activity.  Examples of such economic activities might include buying goods or services or staring a business. Economic cost can calculated by finding the difference between the chosen economic activity and the alternative economic activity or the opportunity cost.

To get the classic example of economic cost, we will look at guns and butter, examining defense spending versus social spending.

If you want to produce a certain amount of guns, you have to give up producing a certain amount of butter and vice versa, and the difference in value is the economic cost for producing the guns. Have it in mind that economic costs are different from accounting costs; accounting costs refers to monetary value of producing a particular goods and services, while economic cost includes monetary value as well as other values, like opportunity cost, resources and satisfaction.

Cost accounting is a systematic process of collecting, recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action & control of costs to enable users make decision. The goal of cost accounting is to advise the management of a company on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management of a particular company needs to control current operations and plan for the future.

Let us look at a quick example of how to identify the difference between accounting costs and economic costs.

For instance I run a company named Trending Accounting Ltd. at my own building (i.e I’m the owner of the building). In this situation, I will not pay any rent for the office space (simply because I am the owner of the building). Now the main question is if I consider the cost of the office space in my accounting records to be zero"?

In an Accountant’s point of view- Yes, the cost will be zero because there is no actual expenditure incurred.
Economist’s point of view- No, the cost cannot be zero because i wasn't using it for my business, I would have earned rent on the office space by leasing it to another firm. This forgone rent is the opportunity cost and should be thus included as part of the economic cost of doing business.

Theoretically,
ACCOUNTING COST account only for the explicit cost (actual money expenditure on inputs or payment made to outsiders for hiring their factor services) while ECONOMIC COST account for both the explicit and implicit cost.

In Summary, ECONOMIC COST includes not only the ACCOUNTING COST(explicit cost) but also the implicit cost.

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