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