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Calculating the accounting and economic costs

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Suppose a company incurs the following costs: Labor - $400, Equipment - $300, Material - $100. However, it owns the building so dosen't have to pay the $800 in rent.

- What is the tolal accounting cost?
- What is the total economic cost?
- Explain why these are different in this way.

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Solution Summary

Solution describes the steps to calculate the total accounting and economic costs in the given case.

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Let us calculate explicit costs first

Explicit costs are costs for which actual payments are made.
Labor Cost = $400
Equipment = $300
Material = $100
Total explicit costs = Labor Cost + Equipment ...

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  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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