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Production Costs
Total Productio n cost —n eludes the true econo mic costs of product ion (The sum of explicit and implicit costs). Econo mic costs of product ion not only in clude acco unting costs but also the opport un ity costs of produc ing each unit of output. Acco un ti ng costs are the explicit costs that appear on the in come stateme nt in cludi ng variable and fixed costs. The opport un ity costs con sist of any implicit costs.
In order to be profitable a bus in ess n eeds to look at all cost measures. Cost-cutt ing in itiatives may end up harm ing a bus in ess future profitability if they are not careful. It is a good idea to base initiatives on eliminating waste or unprofitable activities in light of opport un ity cost (Koch).
Implicit costs —Do not in clude direct mon etary payme nts, but are the opport unity costs of giving up the best alter native. These costs are ofte n times hard to measure, because they do not have a direct dollar value. Managers have to rely on resources to make in formed decisi ons on implicit costs. These resources can in clude the compa ny s finance,
marketi ng, or legal departme nts (Das).
Example #1: Suppose you left your job as an accounting clerk at a factory with $40,000 salary in order to start up your own deli sub restaura nt (Deli-mart). At the end of the first year, you determ ine the cost of running Deli-Mart to be $30,000 and revenues to equal $180,000. Your implicit cost of starting up Deli- Mart equals $40,000. Your implicit cost is $40,000, which is the amount you gave up in order to start up the deli bus in ess.
Explicit costs —Are the acco unting costs directly paid out-of-pocket (mon etary) for the purchase of in puts or the hiri ng of labor n eeded for product ion. Explicit costs of product ion may in clude the cost of raw materials, equipme nt, and wages.
Example #2: As stated in the previous example, the costs of running Deli-Mart are $30,000. These costs in clude food supplies and wages. These are the expl
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