Operating Cost versus Opportunity Cost

1. Operating Cost versus Opportunity Cost

2. 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.

3. 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.

4. 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.

5. 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.

6. Operating Cost versus Opportunity Cost Examples of Implicit Cost • Land • Buildings • Machines • Labor contributed by the owner's of the business.

7. 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.

8. Accounting Versus Economic Cost