When determining production costs and creating services, two provisions are important:
1) any resource is limited;
2) each type of resource has at least two alternative uses.
Limited resources and the inevitability of alternative choices create the need to take into account both explicit and implicit costs of the firm. TO explicit(or accounting) costs include expenses that are accounted for accounting, i.e. when the company spends money (from accounts 50, 51, 52, 55) to pay for resources in the amount necessary to keep this resource at its disposal.
TO implicit costs These include costs that are internal in nature and are not related to cash payments from the company’s accounts, and therefore are not taken into account in the accounting reports. These include opportunity costs associated with using one's own Money companies. An example would be the cost of investing money in shares. Implicit costs are the difference between the amount of dividends and the maximum possible revenue from lending this money at interest.
When planning its activities, an enterprise must take into account alternative possibilities for using available funds. For example, when increasing the period for receiving receivables, one should take into account not only that turnover taxes will increase or the exchange rate may change not in favor of the enterprise, but also what benefit the enterprise will miss in the process of waiting for funds compared to their alternative use in case of timely income (for example, by investing in securities, for a deposit for this period, etc.).
From the point of view of the possibility of lost profits, the following principle of tax planning should be observed - taxes must be paid on the last day of the deadline established for this. If an enterprise pays taxes not in advance, as soon as the tax amount is calculated, but on the last day, then this is equivalent to receiving an interest-free loan from the budget for these days.
Holding cash also incurs an implicit cost, equal to the "forgone" interest due to not using this money as borrowed funds; lending money at interest gives costs equal to the benefit that the owner of the money missed by not spending this money on the formation of a tourism product.
The firm's implicit costs include lost revenue due to ineffective use of patents, service marks, location, know-how, and other advantages.
Explicit and implicit costs form economic costs companies.
The cost of what the seller gives up for the sake of commodity production is costs, which can be external (explicit) and internal (implicit). Implicit costs are expenses with lost revenues.
Firm costs
For example, a seller works in his own china shop and does not receive wages. And if I worked in something other than my own, I would get it. In addition, owning a store requires many costs in addition to wages seller - repairs, movers, cleaning and much more, included in implicit costs. This is fine. Because the owners of their own stores have profits that more than cover explicit and implicit costs, otherwise they would get rid of non-profit-making property.
And the company's costs can simply be reduced. Do not hire a salesperson, for example, so as not to spend money on his wages, but trade yourself. Each company (not necessarily a trading one), while carrying out its activities, incurs certain costs that may be associated with the purchase and repair of equipment and other production factors, as well as with the sale of products that have been produced. The valuation of all these costs is implicit costs. This is compensated by the introduction of economically effective method operation of the enterprise while minimizing costs. That is, the owner of a crockery shop can combine his work as a manager with the responsibilities of a seller, loader and cleaner. This minimizes costs. Or it will introduce a much more innovative approach to business.
Types of implicit costs
Production costs are expenses for the production of services or goods directly. What is associated with implementation is distribution costs. Implicit costs are both the costs of the company itself (individual), and the totality of costs in the process of producing a product. This includes personnel training and protection of the surrounding area - many costs called public.
Further, the classification of costs deals in detail with each type specifically. We will talk about this a little further, since first we need to note those expenses that cannot be classified as basic. Implicit costs are also additional expenses to bring manufactured products to the consumer. Here, for example, packaging, storage, packaging, transportation. Net costs of distribution are the costs of acts of purchase and sale: wages of sellers, including trade accounting, advertising and much more. They are called pure because they do not form a new value, but are subtracted from the value of the product.
Approaches to the essence
Explicit and implicit costs are considered from two different perspectives - accounting and economic. An accountant looks to the past, and an economist looks to the future.
- Accounting implicit costs are an estimate of the cost of resources already used, and prices remain actual and equal to sales. Thus, a value appears called the cost of production.
- From an economist's point of view, implicit costs represent a problem of limited resources and the calculation alternative uses their. By and large, all costs have the opportunity to become alternative.
The economist simply chooses best option work using resources, designed to make a profit not today, but in the foreseeable future. This means that it often turns out that economic costs exceed explicit and implicit ones. At best, the expenditure of a resource to produce a good or service is equal to its value, but the most profitable possible use is always used. A firm's economic costs are almost always greater than its accounting costs because they are total and opportunity costs.
Classification
Economic costs, as already mentioned, are significantly greater than any other, and classification will require a certain starting point, a principle by which it will be carried out. For example, dependence on payment for resources. According to this principle, all costs economic plan are simply divided into two unequal parts.
- Explicit costs are external, that is, they are expenditures of money with which the company pays service providers, fuel, raw materials, all kinds of auxiliary materials, transport, and so on - in the case when the suppliers are not related to the ownership of the company. These expenses are necessarily reflected in the balance sheet and reports and therefore can be classified as accounting costs.
- Internal (implicit) production costs are expenses for independently used own resources. In a company, they are the equivalent of cash payments that could be received for a resource used independently, that is, the use will be most optimal.
Return to the first example
There are numerous examples of implicit costs, but it is better to limit yourself to the familiar ones and consider them with different sides. So we have the owner small store located in its own premises. Now, if it weren’t for the store, then this area could be rented out for ten thousand rubles, for example. This uncollected monthly amount is a category of internal costs. And if we add here the mythical wages, if the owner worked not for himself, but for another person, this would amount to a considerable amount of internal costs.
What keeps the shop owner from saying goodbye to own business, we have already discussed. But it wouldn’t hurt to extend the analogies and make them more specific. The minimum fee that keeps the business going is called normal profit. You don’t need to add wages in someone else’s company with money received for rent, but add up lost income with normal profit, then you get what is considered internal (implicit) costs. Economists count everything: both explicit and implicit costs, plus normal profit.
Wear
When capital resources lose their original value, it is called depreciation. The loss of technical and production properties of the means of labor, in other words, consumer qualities, is physical wear and tear, and if the value of capital securities decreases, which is often not related to the level of consumer qualities, this is moral wear and tear. The first causes an increase in efficiency in the production of capital goods, that is, even cheaper, but similar new means of labor appear, with similar functions and more advanced ones.
Obsolescence is a consequence of scientific and technological progress, which is an unpredictable increase in costs for the company: consistency is leaving this process. When physical wear and tear occurs, expenses are variable: since capital equipment lasts significantly more than a year, its cost is gradually transferred to finished products- the so-called depreciation. Enterprises have a special depreciation fund.
Deductions for depreciation
These deductions reflect an assessment of the amount of wear and tear and its magnitude, so they are also an item of implicit costs. But the role of these deductions is beneficial, because only they will serve in the future as a source of renewal of capital goods. Depreciation rates are established by law state level as a percentage of the depreciation value for the year. Depreciation shows how long it will take to recover the cost of all fixed assets.
According to the law of diminishing marginal returns, which operates only in the short term and is relative in nature, it is still possible to calculate that fatal starting point when variable factors applied additionally will not help keep production from declining or falling in production growth. Even if only one factor fails - with all others remaining unchanged - it will happen.
Sunk costs
Implicit costs cannot be identified with irrecoverable costs, which the company incurs once and will never be able to return. For example, if the owner of our store spent a certain amount on a sign, then even if he sells his business, he will not return the money for its production.
Also, the classification criterion can be the time intervals during which the costs occurred. Since the firm's fixed costs for producing products do not completely depend on the prices of factors of production, part of the costs will depend on which specific ones are used, when and in what quantity. Based on this, long- and short-term periods in the activities of a given company are classified.
Summary
- If a store owner subtracts all external (explicit) costs from total revenue, he will have an accounting profit that does not take into account only internal (implicit) costs.
- If he subtracts implicit (internal) costs from there, he will receive the amount of economic profit.
- But with all this, economic profit must take into account the costs of both.
- If the total revenue of the company is equal to the total costs, then normal profit appears, and the minimum level of profitability of the enterprise is where the owner benefits from his business, but economic profit can also be zero.
- The presence of net economic profit means that this enterprise uses resources efficiently.
- Economic profit is less than accounting profit by the sum of all implicit costs, and yet it is precisely the criterion for the success of a company or enterprise.
Production costs can be interpreted as expenses for improving economic resources. This science itself offers only four criteria for assessing factors of production. These are primarily labor, capital, land and entrepreneurial ability. If a store owner competently attracts these resources to his business, he will definitely receive a secure income based on four parameters: wages, rent, interest and profit.
Are there hidden costs of deferring payments to suppliers? Will suppliers now question the company's short-term solvency?
Net, or economic, profits are determined by subtracting all explicit and implicit costs (including normal profits) from the firm's total revenues.
Implicit costs of an entrepreneur
Thus, the firm's accounting costs are less than economic costs by the amount of implicit costs. The differences between explicit and implicit costs are as follows.
Having received this information, the farmer, unlike the accountant, should first of all pay attention not to accounting costs, but to the opportunity cost of operating his farm. This requires estimating implicit costs and adding them to explicit costs determined by accounting. For a farmer, an alternative to working on his own farm is the opportunity to work as a manager on another farm. In this case, he could earn, for example, 30,000 rubles. in year. He includes this amount in expenses as his implicit earnings. The wife working on the farm could receive 10,000 rubles elsewhere, which constitutes her implicit earnings.
Adding all implicit costs to accounting ones, we get total alternative, or economic, costs. farm in a year. As shown in table. 9-1, they amount to 173,000 rubles.
But the reward for the entrepreneurial factor comes not only from normal profit, which is included in economic costs, but also from a possible surplus of income that exceeds explicit and implicit costs, i.e., from economic profit. How does this surplus arise, where does economic profit come from in a competitive system, if all factors of production - labor, capital, land, entrepreneurship - are rewarded?
Let us assume for simplicity that the enterprise acquires resources at free market prices, reflecting “opportunity costs”. Will the latter in this case be equal to monetary costs? It turns out that this does not always happen. The fact is that along with “explicit” costs (costs of materials, equipment, labor, etc., purchased externally by the enterprise), there may also be “implicit” costs (the cost of expended resources that are the property of the company). The latter includes the labor of the entrepreneur-owner, interest on his invested capital, etc. “Implicit” costs sometimes also include the “normal” profits required for a firm to remain in a given industry.
So, we assume that the company’s behavior is rational, and its goal is to maximize the profit received (the difference between the company’s revenue and costs). However, costs here are understood as costs in the “economic sense”, that is, “costs of lost (alternative) opportunities,” including “implicit” costs (payment of labor to the owner of the company, “normal” profit, etc. - see section 2, lectures 3). Consequently (as in the case of costs), it is necessary to distinguish between two approaches to the concept of profit.
IMPLICIT COSTS are alternative costs that belong to the company itself, i.e. expenses not covered by it. Implicit costs can be represented as a) monetary payments that a company could receive if it used its resources more profitably; this also includes the cost of lost opportunities (lost profit) b) normal profit as the minimum remuneration to an entrepreneur that keeps him in his chosen industry. For example, an entrepreneur engaged in the production kitchen utensils, considers it normal for himself to receive 15% on invested capital. For example, all other entrepreneurs share the same point of view. Therefore, if the production of pots gives the entrepreneur less than normal profit (8-10%), then he will move his capital to industries that give him at least normal profit (or more). The flight of capital from an unprofitable industry will, in turn, lead to an increase in its profitability to normal level(if the demand for goods in a given industry is constant, then a smaller capital will be able to receive the same profit. Consequently, the profit per unit of capital will increase).
Explicit and implicit costs economic and accounting costs economic and accounting profit fixed and working capital depreciation methods of depreciation book profit fixed and variable costs gross, average, marginal product gross, average, marginal costs average constant, average variable costs.
Firstly, there is no separate accounting of economic and accounting costs, there is no accounting of explicit and implicit costs, there is only an accounting approach. The costs of lost (alternative) opportunities, Implicit costs, remain unaccounted for.
But in addition to explicit costs, the manufacturer also has to take into account the so-called implied (implicit) costs. Let us reveal their essence using a conditional example.
Possible various options classification of production costs and opportunity costs. In this case, it is usually customary to distinguish between explicit and implicit costs.
Implicit costs are equal to the monetary payments that could be received for an independently used resource in the best possible way of using it. Implicit costs are lost costs.
IMPLICIT COSTS - see IMPLICIT COSTS
IMPLICIT COSTS are the opportunity costs of using enterprise resources that do not compensate for explicit (monetary) payments.
Implicit (imputed) costs are the opportunity costs of using resources owned by the organization itself, i.e. costs not paid by it. Implicit costs can be presented as monetary payments that an organization could receive if it used its resources more profitably, i.e., these are the costs of lost opportunities (lost profits). Opportunity costs are not reflected in accounting.
IMPLICIT COSTS, implicit - see. OPPORTUNITY COSTS.
When generating project cash flows used in financial analysis of the project, it is necessary to take into account a number of features that distinguish it from conventional accounting calculations. These features are associated with the fundamental economic concept of opportunity costs (opportunity ost). Any economic resource affected by a project must be valued at the value of its best possible use. When assessing the economic value of the resources used, both explicit (accounting) costs, which lead to actual cash payments, and implicit ones, which do not lead to cash costs (payments), are taken into account. Implicit costs include lost opportunity costs associated with
The nature of production costs
Production of products that excludes the occurrence of any costs is impossible in itself. Absolutely any decision to produce something inevitably entails either a refusal of resources in the production of some products in order to regroup them for the production of a new product, or a refusal of payments or income that will be used to purchase the resources necessary for a new production.
The functioning of any enterprise is always based on the use of a number of production factors, from the use of which income is generated. Factors of production are particularly important elements that can have a decisive impact on the performance of all production activities. The main factors of production include:
- land;
- capital;
- work.
Economists also often highlight factors such as entrepreneurship itself and time.
Note 1
Real business activity always involves a search for such a combination of components of production activity that will give the maximum yield of the final product at minimum costs.
The great variability of such combinations is due to both the state of the markets and scientific and technological progress. Production is fluid due to constant discoveries, changes, and innovations. The organization itself is constantly searching for new ways of production and more rational development. In these processes, knowledge and ability to correctly estimate the costs of production activities can be of great service for further activities.
The costs that an organization faces in the production process include:
- payments to investors;
- employees;
- owners of resources necessary for production.
These payments are aimed at attracting the necessary factors of production. All these costs can also be classified into explicit and implicit.
Explicit costs
Definition 1
Explicit costs are costs that take the form of monetary (direct) costs.
These include payments to suppliers of factors of production, as well as intermediate products necessary for the production of the final product. Explicit costs also include wages to company employees, payments to trading firms, banks and other financial service providers.
All obvious costs are necessarily reflected in accounting statements enterprises, in connection with which they are often called accounting costs. They represent payments for external obligations when attracting factors of production, as well as accrued expenses, such as depreciation.
One way or another, absolutely all the firm’s explicit costs ultimately come down to reimbursement of the used factors of production.
Implicit costs
If you include only explicit costs in the amount of production costs, the final figure may turn out to be greatly underestimated, and accordingly, the amount of expected profit will be excessively overestimated. In order to more accurately predict the final indicators based on the results of decision-making, costs should include not only explicit, but also implicit costs.
Definition 2
Implicit costs are the costs of using resources that are the property of the producing organization itself.
They do not include payments by the organization to other firms or individuals. These costs are not provided for in any contracts and are not mandatory for explicit payments. Despite the fact that implicit costs are not reflected in the financial statements, this does not make them any less real.
Topic 9 PRODUCTION COSTS
Lecture 9.1 Company cost structure
The concept of economic costs. Explicit and implicit costs
The concept of costs in economic theory based on the fact of scarcity of resources and the possibility of their alternative use. The choice of certain resources for the production of a certain good means that they cannot be used to produce another alternative good. Based on this, costs in the economy are directly related to the refusal of the possibility of producing alternative goods and services. In other words, the economic cost of any resource chosen to produce a good is equal to its best-case value (or value) possible options use. For example, steel used to make weapons will be lost to make cars. And if a worker is capable of producing both tape recorders and sewing machines, then the cost incurred by society in employing that worker in a musical equipment factory will be equal to the contribution he could have made to the production of sewing machines.
From the perspective individual firm economic costs- these are the payments that the firm is obliged to make, or the income that the firm must provide to suppliers of resources (owners of factors of production) in order to divert these resources from use in alternative production.
The company takes into account in its activities the so-called explicit ( or external ) And implicit(internal) costs.
TO explicit include all costs of the company to pay for the factors of production used, i.e. These are the payments that the firm makes to the owners of factors who are not the owners of the firm. In the lecture “Production - material basis Economics" (topic 5) we got acquainted with the factors of production. The classic factors are labor, land (natural resources) and capital. Modern economists tend to single out entrepreneurial abilities as a special factor of production. One way or another, all the firm's explicit costs ultimately come down to reimbursement of the used factors of production. This includes payment for labor in the form of wages, land in the form of rent, capital in the form of expenses for fixed and working capital, as well as payment for the entrepreneurial abilities of the organizers of production and sales. The sum of all explicit costs appears as production cost, and the difference between the market price and the cost is like profit.
However, the amount of production costs, if only explicit costs are included in them, may be underestimated, and profits, accordingly, overestimated. For a more accurate picture, so that the company’s decision to start or develop production is justified, the company’s costs should include not only explicit, but also implicit expenses.
Implicit costs of the company are called opportunity cost ( opportunity cost) use of resources owned by the company. These costs are not included in the firm's payments to other organizations or individuals because the firm uses certain resources that it owns. For example, the owner of the land does not pay rent, however, he cultivates the land himself, thereby refusing to rent it out and the additional income arising in connection with this. A self-employed worker is not hired by a factory or paid there. Finally, an entrepreneur who has invested his money in production cannot put it in a bank and receive loan (bank) interest. Thus, from the point of view of the firm, these internal costs are equal to the monetary payments that could be received for the independently used resource under the best of all possible ways– its application.
For clarity of the above theoretical considerations, we present specific example. Let's assume that you are the sole owner of a pharmacy. The pharmacy premises are your full property; you use your own labor and financial capital. Thus, you have no obvious (external) costs for paying rent and wages. However, implicit (internal) costs still exist. So, if you were to rent out your pharmacy space to someone else, you could receive $800 a month in rent payments. By using your own cash capital to develop your business, you sacrifice the interest that you could receive as payment for the loan. You also lose the wages that you could receive if you worked not in your pharmacy, but, say, in a state military plant. And finally, by managing your own enterprise, you give up the earnings that you could have had by offering your management services to some other company.
An element of internal costs is also normal profit which is essentially the minimum fee required to keep your entrepreneurial talent within your enterprise. If this minimum reward is not provided, the entrepreneur will redirect his efforts from this direction activity for another, more attractive one, and perhaps even give up entrepreneurship for the sake of a salary or salary. It can also be said that normal profit- this is a profit equal to the implicit costs invested in the business by the owner of the company. For example, having invested 1 million rubles in a business, he will receive a profit of 7%. If at this time interest rate is also 7%, then the profit received will be normal, reflecting the implicit costs associated with the possibility of investing 1 million rubles in the bank.
Economists consider as costs all payments - both explicit and implicit (external and internal), including the latter and normal profit - necessary to attract and retain resources within a given area of activity.
The difference between explicit and implicit costs allows us to understand the difference in the analysis of business by accountants and economists. Economists are primarily interested in studying how firms make decisions about pricing and output, so when measuring costs they take into account all opportunity costs. In contrast, accountants are engaged in tracking exclusively incoming and outgoing cash flows firms That is, they only take into account explicit costs.
The difference in the approaches of economists and accountants is easy to see in the example of Helen's bakery. If Helen turns down an opportunity to make money as a programmer, her accountant has no right to count her employer's decisive action as a cost of making the buns. Since the company did not spend a single cent to cover the owner's implicit costs, they cannot be reflected in the accounting documents. The economist, however, would count the lost income as a cost because it influences Helen's business decisions. For example, if a programmer's salary increases from one hundred dollars an hour to five hundred dollars an hour, Helen may conclude that continuing to make muffins is becoming too expensive and choose to close the bakery to work as a full-time programmer.
Because economists and accountants take into account costs different ways, their methods of calculating profits are also not identical.
Economist calculates economic profit as the difference between the firm's gross income (revenue from sales of products) and all (explicit and implicit) costs.
Accounting profit(financial profit) is the difference between a firm's gross income and its explicit costs. In practice, as a rule, a manager is faced with precisely this type of profit.
Thus, since accountants ignore implicit costs, accounting profits exceed economic profits. And from an economist's point of view, profitable business is in cases where gross income covers all lost opportunity costs, both explicit and implicit.
Dividing costs into explicit and implied is one of the possible classification methods. Factors of production have certain properties and obey certain laws. Factors can replace each other to a certain extent. Thus, machines replace human labor and vice versa. The movement of a factor of production, as well as a change in its functions, is called factor mobility. The more mobile a factor of production, the more profitable it is for the company.
However, there are factors that are absolutely mobile, and there are those that are weakly mobile, the functions of which cannot, or are difficult, or are extremely unprofitable to change. Such factors are said to contain a monopoly element and, accordingly, require a monopoly payment for their use, called monopoly rent. Rare talent or specialist rare profession, unique plots of land (for example, land suitable for growing unique varieties of tea) are expensive precisely because, in addition to the usual costs - wages, rent– their compensation should include monopoly rent.
