Question

Barney decides to quit his job as a corporate accountant, which pays $10 890 a month, and goes into business for himself as a certified public accountant. He runs his business from his converted garage apartment, which he could rent out for $926 a month if he wasn’t using it as a home office. He must purchase office supplies worth $71 a month, and his monthly electricity bill has increased by $90 now that he is working out of his home office. After six months of working from home, Barney has earned an average of $15 000 per month.a. What are Barney’s monthly explicit costs? b. What are Barney’s monthly implicit costs? c. What are Barney’s monthly economic costs?

Answer 1

Answer:

a. Barney's monthly explicit costs: $161;

b. Barney's monthly implicit costs: $11,816;

c. Barney's monthly economic costs: $11,977

Explanation:

a.

Barney's monthly explicit costs include any costs that he actually paid extra every month as the result from running his business including: cost of office supplies + cost of electricity bill = $71 + $90 = $161

b.

Barney's monthly implicit costs include any cost that he does not actually pay extra, yet he has to sacrifice these income as the results of running his business which includes: Cost related to his salary sacrifice + Cost related to his apartment rental = 10,890 + 926 = $11,816

c. Barney's monthly economic costs = Barney's monthly explicit costs + Barney's monthly implicit costs = $11,977

Answer 2

Answer:

a) Barney's monthly explicit costs are the costs of office supplies and monthly electricity bill increase, which are $161 or $(71 + 90).

b) Barney's monthly implicit costs are the costs of salaries not earned and the rent of his home office.  These equal to $11,016 or $(10,890 + 926).

c) Barney's monthly economic costs are the total of explicit and implicit costs.  These equal to $11,970 or $(161 + 11,016).

Explanation:

There are many cost classifications when the impact of costs on profits are to be calculated.  In this example, we shall discuss the following:

a) Explicit Costs: These are the costs which a business incurs by running the organisation.  They usually and directly affect profitability.  Every business tries to minimize such costs.  Example is the cost of Wages and Salaries paid to employees.

b) Implicit Costs:  These costs are opportunity costs incurred when a business pursues an alternative decision vis-a-vis another or uses its own internal resources instead of paid resources.  They are usually calculated for decision making purposes.  An example is the cost of rent that could have been incurred if the asset is not internally sourced.

c) Economic Costs:  These are costs that include both actual and opportunity costs.  It tries to weigh all costs, including the costs for pursuing alternative courses of action.