Question

5- Economists disagree with the accountants regarding computing and reporting the cost of production. Please explain the critical difference and discuss, with an example, how these different views affect the profit of a company.

Answer 1

Costs are important in economics in determining the allocation of resources based on what firms are willing to pay, which in turn depends on how much consumers are willing to pay for the products produced by these resources. Costs reflect the market prices of the resources used in production, but also economic costs include the opportunity cost of using some resources that may not have an explicit market price. Economists argue that the cost of all resources should be considered when determining the real cost of production.Implicit

Implicit costs are as important as explicit costs which are generally the so-called “accounting costs.” For example, economists (but not accountants) would count the income forgone in the use of the owner’s time as an economic cost, the interest forgone by using one’s own funds, and so on. These implicit costs should be counted so one can judge the true economic or opportunity cost of production. If these costs are neglected, then an overallocation of resources could occur because not all of the production costs are being measured.