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Operating Cost versus Opportunity Cost. Learning Outcomes Operating Cost versus Opportunity Cost. Define Operating Cost and Opportunity Cost. Define Explicit Cost and Implicit Cost. Discuss examples of operating cost and opportunity cost.
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Learning OutcomesOperating Cost versus Opportunity Cost • Define Operating Cost and Opportunity Cost. • Define Explicit Cost and Implicit Cost. • Discuss examples of operating cost and opportunity cost. • Demonstrate the difference between operating cost and opportunity cost. • Compare the concepts of Accounting and Economic cost. • Demonstrate understanding of Operating Cost versus Opportunity Cost by completing Sugar Shack exercise for grade.
Economic Cost • In economics, the notion of a firm’s costs is based on the notion of economic cost. • The key concept underlying the computation of economic cost is the concept of opportunity cost. • Concept of Opportunity Cost The opportunity cost of something is what you must sacrifice to get it.
Operating Cost versus Opportunity Cost • Operating Cost = Explicit Cost • Opportunity Cost = Explicit + Implicit Cost • Operating Cost or Explicit Cost are outlay costs associated with either purchasing or hiring resources that the business needs to operate. • Implicit Cost are costs associated with resources owned by the business itself.
Operating Cost versus Opportunity Cost Examples of Operating Cost • Raw materials • Labor • Electricity • Fuel • Maintenance • Taxes • Interest payments • Phone service • Rental charges to a plant.
Operating Cost versus Opportunity Cost Examples of Implicit Cost • Land • Buildings • Machines • Labor contributed by the owner's of the business.
Accounting Versus Economic Cost • An accountant’s idea of costs involves only the firm’s operating costs or explicit costs. • Operating or Explicit cost: the firm’s actual cash payments for its inputs. • An economist includes the firm’s opportunity or implicit costs. • Implicit cost: the opportunity cost of nonpurchased inputs. • Economic cost: the sum of explicit cost plus implicit cost.