Question

Suppose you want to start a business. What are some of the costs you would look at? For Eg you may have to look at -

Labor costs: salaries, stipends, fringe benefits
Operating costs: rent, supplies and materials, minor equipment and furniture, contracted services, postage, telephone, staff training, local travel
Indirect costs: depreciation - capital equipment, custodial services
Societal costs: positive or negative impact on society
By wed: Break the costs and market structure by

a) Economic and Accounting costs (2 points)

b) Short Run cost - Fixed costs and Variable Costs (2 points)

c) Long Run Costs (1 point)

d) Barrier to entry/exit (1 point)

e) Now- Where would you fit Health Care for your employees? What would be the short run and long run impact? (2 points)

Answer 1

For parts a, b and c of the question I have tried to classify the cost lines and their categories in the table below.

Cost Line	Category	Classification 1*	Classification 2**
Salaries	Labour Costs	Accounting Costs	SRC - Fixed Costs
Stipends	Labour Costs	Accounting Costs	SRC - Fixed Costs
Fringe Benefits	Labour Costs	Accounting Costs	SRC - Fixed Costs
Rent	Operating Costs	Accounting Costs	SRC - Fixed Costs
Supplies & Materials	Operating Costs	Accounting Costs	SRC - Variable Costs
Minor Equipment & Furniture	Operating Costs	Accounting Costs	SRC - Fixed Costs
Contracted Services	Operating Costs	Accounting Costs	SRC - Fixed Costs
Postage	Operating Costs	Accounting Costs	SRC - Variable Costs
Telephone	Operating Costs	Accounting Costs	SRC - Variable Costs
Staff Training	Operating Costs	Accounting Costs	SRC - Fixed Costs
Local Traveling	Operating Costs	Accounting Costs	SRC - Variable Costs
Depreciation - Capital Equipment	Indirect Costs	Accounting Costs	SRC - Fixed Costs
Custodial Services	Indirect Costs	Accounting Costs	SRC - Fixed Costs
Positive Impact on Society	Societal Costs	Economic Costs	Long Run Costs
Negative Impact on Society	Societal Costs	Economic Costs	Long Run Costs

Explanations for the classifications are as follows:

* Accounting costs are expenses that are actually incurred, that can be verified and are accounted for in the books of accounts as well as financial statements. Economic costs are implicit/ implied costs as they cannot be quantified or verified easily. They can only be estimated or gauged.

** Fixed costs are those that are incurred irrespective of the output/ usage. Variable costs differ based on the quantity purchased/ units consumed. SRC - Short Run Costs are those that can be expensed/ accounted for in a year's time. Long Run Costs are those whose impact is seen over several years.

Explanation for part d of the question:

Economic costs can be barriers to entry/ exit. For example, a business that has a negative impact on society in terms of environmental hazards/ pollution/ depletion of natural resources etc. could have entry barriers as it would receive a lot of opposition from activists & scientists, restrictions by the govt. etc. On the other hand, a business that has a positive impact on society (but is not financially viable) may be difficult to exit as customers may oppose the move to close down, many expenses may have to be written off etc.

Explanation for part e of the question:

Health Care would go as part of employee 'cost to company' and is a fixed cost. It is an expense in the short and long term but has several benefits as well. It would help in employee retention, show case the company as 'employee friendly' and improve its brand value/ goodwill, the company could claim tax benefits due to this expense etc.