Cost Concepts

Cost concepts are accounting and economic principles that refer to the amount of money spent to acquire goods and services. Cost concepts include fixed costs, variable costs, opportunity costs, and more. 

Cost concepts in accounting 

• Historical cost:  Financial transactions are recorded at their original cost, not their current market value  

• Fixed costs: Costs that don’t change based on production  

• Activity-based costing:  Assigns overhead costs to specific cost objects, such as goods or services  

Cost concepts in economics 

• Explicit costs: Costs that are directly associated with a company’s operations  

• Implicit costs: Costs associated with resources that are provided to the company with no price tag  

• Opportunity costs: The costs of missed opportunities  

Other cost concepts  

• Outlay costs, which include the actual expenditure of funds on factors like material, rent, and wages 

• Direct/traceable costs and indirect/untraceable costs 

• Incremental costs and sunk costs 

• Private costs and social costs 

Cost Concepts 

Accounting and Economic Costs 

When a firm starts producing goods, it has to pay the price for the factors employed for the production. These factors include wages to workers employed, prices for the raw materials, fuel and power used, rent for the building he hires, and interest on the money borrowed for doing business, etc. 

Accounting Costs are these costs which are included in the cost of production. Hence, accounting costs take care of all payments and charges that the firm makes to suppliers of different productive factors. 

Usually, a businessman invests some capital in his firm. If he would have invested the amount in some other firm, then he could have earned a certain interest/dividend. Further, he invests time for his business and also contributes his entrepreneurial and managerial ability to the business. 

If not involved in the business, he could have offered his services to other firms for an amount of money. Accounting costs DO NOT involve these costs. They form a part of the Economic Costs. Hence, Economic costs include: 

The normal return on the money that the businessman invests in his own business 

The salary not paid to the entrepreneur but could have been earned if the services would have been sold elsewhere. 

A reward for all factors owned by the businessman and used in his own business. 

Therefore, the accounting costs involve cash payments that the firm makes. Economic costs, on the other hand, include the accounting costs and also take into account the amount of money the businessman could have earned with his resources if he would not have started the business. 

Another name for accounting costs is Explicit Costs. Whereas, the alternate name for the costs of factors that the businessman owns is Implicit Costs. A businessman earns profits when his revenues exceed both explicit and implicit costs.