Explicit costs in the territory. Concept of costs

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 especially 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 production factors, as well as intermediate products necessary for the production of the final product. Also obvious costs include wages employees of the enterprise, payments trading companies, banks and other financial service providers.

All obvious costs are sure to be 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 included in the amount production costs only obvious costs, then the final figure may 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.

Are there implicit 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) cash payments that the firm could have received if more beneficial use resources belonging to it, this also includes the costs of lost opportunities (lost profit) b) normal profit as the minimum remuneration to an entrepreneur that keeps him in his chosen field of activity. 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 a normal level (if the demand for goods in this 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 would be received for the resource used independently in a best-of-all scenario. possible ways its application. 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 related to the fundamental economic concept 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

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, you should take into account not only that sales taxes will increase or that the exchange rate not in favor of the enterprise, but also what benefits the enterprise will miss in the process of waiting for funds compared to their alternative use in case of timely receipt (for example, by investing funds 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 "lost" interest due to not using this money as borrowed money; 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.

Producer Equilibrium

Isocosta. Isocost equation.

Isocosta (Isocost) - a line showing all available options for combining two factors of production, at which the total costs of their acquisition will be equal.

Isocosts are both the line of the budget constraint and the line equal costs companies.

Isocost can also be described by the equation:

B= P K × K + P L × L

Where B- the company's budget for purchasing factors of production;

P K- price per unit of capital;

K- amount of capital;

P L- labor unit price;

L- amount of labor.

In Fig. 1 shows how the isocost behaves if the amount of the firm’s budget intended for the purchase of factors of production changes. In this case, the budget amount was increased (to the amount B 2) as a result of which the isocost moved upward.

In Fig. Figure 2 shows how the isocost line will move if the price of one of the factors changes. In this example, the price of the quantity of labor increased (to the value L 2) and the isocost changed its angle of inclination

Producer equilibrium is a state of production in which the use of factors of production allows obtaining the maximum volume of output, that is, when the isoquant occupies the point farthest from the origin. To determine the producer's equilibrium, it is necessary to combine the isoquant maps with the isocost map. The maximum output volume will be at the point where the isoquant touches the isocost (Fig. 21.6).

Rice. 21.6. Producer Equilibrium

From Fig. 21.6 shows that the isoquant located closer to the origin of coordinates gives a smaller amount of output (isoquant Q1). Isoquants located above and to the right of isoquant Q2 will cause a change in a larger volume of factors of production than the producer's budget constraint allows.

Thus, the point of tangency between the isoquant and isocost (point E in Fig. 21.6) is optimal, since in this case the manufacturer receives the maximum result.

Explicit costs are determined by the amount of enterprise expenses for paying for external resources, i.e. resources not owned by the firm. For example, raw materials, materials, fuel, work force etc. Implicit costs are determined by the cost of internal resources, i.e. resources owned by the firm.

An example of an implicit cost for an entrepreneur would be the salary that he could receive as an employee. For the owner of capital property (machinery, equipment, buildings, etc.), previously incurred expenses for its acquisition cannot be attributed to the explicit costs of the present period. However, the owner incurs implicit costs, since he could sell this property and put the proceeds in the bank at interest, or rent it out to a third party and receive income.

Implicit costs, which are part of economic costs, should always be taken into account when making current decisions.

Explicit costs- These are opportunity costs that take the form of cash payments to suppliers of factors of production and intermediate goods.

Explicit costs include:

§ workers' wages

§ cash costs for the purchase and rental of machines, equipment, buildings, structures

§ payment of transportation costs

§ communal payments

§ payment of suppliers material resources

§ payment for services of banks and insurance companies

Implicit costs- these are the opportunity costs of using resources owned by the company itself, i.e. unpaid expenses.

Implicit costs can be represented as:

§ cash payments that a company could receive if it used its resources more profitably

§ for the owner of capital, implicit costs are the profit that he could have received by investing his capital not in this, but in some other business (enterprise)

Economic profit is determined by the difference between total revenue and total costs, but total costs include both external and internal costs. Thus, accounting profit is always either greater than or equal to economic costs. Note that official statistics take into account exactly external costs and accounting profit. This is what we are used to. Economic costs And economic profit calculated on a local scale and for specific situations.

Monetary resources that need to be produced to produce products. For the firm, such expenses act as payment for acquired factors of production.

Costs are divided into fixed, variable and general. Fixed costs- these are the expenses that a company incurs within the framework of production cycle. are determined by the enterprise independently. These costs will be present throughout all product production cycles at a given enterprise. Variable costs- costs that are transferred in full to the finished product. General costs- expenses that the enterprise incurs during the production stage. That is, total expenses represent constants and in total.

Also, costs are classified into accounting (explicit costs reflected in balance sheet), and also alternative ones. Accounting expenses represent the price of resources used in their acquisition prices. Opportunity costs are both explicit and implicit costs combined.

In addition, external, private and public costs are distinguished. External costs are those portions of the opportunity costs for which the company is not responsible. These costs are covered from the funds of other members of society. For example, if an enterprise pollutes nature through its work and is not responsible for this, then the costs of compensating for pollution will represent external costs to other enterprises or individuals. Private costs are the part of expenses that is generated directly by those who engage in this activity. Social costs are the sum of external and private costs.

Dividing costs into implicit and explicit

As already noted, from the division of costs into accounting and alternative costs, a classification into implicit and explicit follows.

Explicit costs of activity are determined by the total costs of the company to pay for the external resources used, that is, those resources that are not owned by the enterprise. For example, this could be raw materials, fuel, supplies, labor, and so on. Implicit costs determine the cost of internal resources, that is, resources that are owned by a given firm.

An example of an implicit cost would be the salary an entrepreneur would receive if he were employed. The owner of capital property also incurs implicit costs, since he could sell his property and put the proceeds in the bank at interest, or rent out the property and receive income. When solving current problems, you should always take into account implicit costs, and if they are large enough, it is better to change your field of activity.

Thus, explicit costs are opportunity costs that take the form of payments to suppliers of intermediate goods and factors of production for the enterprise. This category of expenses includes wages to workers, payments to resource suppliers, payments to insurance companies, banks, cash expenses for the purchase and rental of machines, equipment, structures and buildings.

Implicit costs are understood as the opportunity costs of using resources that belong directly to the enterprise, that is, unpaid costs. Thus, implicit costs include monetary payments that an enterprise could receive if it used its resources more profitably. For the owner of capital, implicit costs include the profit that the owner of the property could have received by investing capital in some other area of ​​​​activity, and not in this particular area.