Accounting Cost vs. Economic Cost

Attribute	Accounting Cost	Economic Cost
Definition	Explicit costs incurred by a business for its operations	Includes both explicit and implicit costs incurred by a business
Scope	Focuses on monetary costs recorded in financial statements	Considers all costs, including opportunity costs and externalities
Calculation	Based on historical data and transactions	Includes future costs and benefits in decision-making
Purpose	Used for financial reporting and tax purposes	Helps in making economic decisions and evaluating profitability

Definition

Accounting cost refers to the actual expenses incurred by a business in its operations. It includes explicit costs such as wages, rent, utilities, and materials. On the other hand, economic cost takes into account both explicit costs and implicit costs. Implicit costs are the opportunity costs of using resources in a particular way, such as the income that could have been earned if those resources were used differently.

Scope

Accounting cost is limited to the expenses that are recorded in a company's financial statements. It does not consider the broader impact of decisions on the overall economy. Economic cost, on the other hand, looks at the full cost of a decision, including both the direct costs and the opportunity costs. This broader perspective allows for a more comprehensive analysis of the true cost of a decision.

Time Horizon

Accounting cost is typically focused on the short-term financial impact of decisions. It looks at the costs that are incurred in a specific accounting period. Economic cost, on the other hand, takes a longer-term view. It considers the impact of decisions over the entire life of a project or investment, including the effects on future revenues and costs.

Decision Making

Accounting cost is often used by managers to make day-to-day operational decisions. It provides a clear picture of the costs associated with different options. Economic cost, on the other hand, is more useful for strategic decision-making. By considering the full cost of a decision, including opportunity costs, managers can make more informed choices that align with the long-term goals of the organization.

Measurement

Accounting cost is relatively easy to measure, as it is based on actual expenses that are recorded in the company's financial statements. Economic cost, on the other hand, can be more challenging to quantify. It requires estimating the value of opportunity costs, which are not always easily quantifiable. This can make economic cost a more subjective measure than accounting cost.

Externalities

Accounting cost does not take into account externalities, which are the costs or benefits that are not reflected in the market price of a good or service. For example, the environmental impact of a production process is not included in accounting cost. Economic cost, on the other hand, considers externalities. By including these costs in the analysis, economic cost provides a more accurate reflection of the true cost of a decision.

Long-Term Sustainability

Accounting cost may not fully capture the long-term sustainability of a business. By focusing solely on the expenses recorded in the financial statements, accounting cost may overlook the broader impact of decisions on the environment, society, and future generations. Economic cost, on the other hand, takes a more holistic view of sustainability. By considering the full cost of a decision, including externalities, economic cost can help businesses make choices that are more sustainable in the long run.

Conclusion

In conclusion, accounting cost and economic cost are two different ways of measuring the cost of decisions. Accounting cost focuses on the actual expenses incurred by a business, while economic cost takes a broader view that includes both explicit and implicit costs. While accounting cost is useful for day-to-day decision-making, economic cost provides a more comprehensive analysis that can help businesses make more informed choices that align with their long-term goals and values.