The cost of what the seller refuses for the sake of commodity production is the costs that can be external (explicit) and internal (implicit). Implicit costs are expenses with lost revenues.
Company costs
For example, the seller works in his own convenience store and does not receive wages. And if he didn’t work in his own way, he would receive. In addition, your own store requires many costs in addition to the seller’s salary - repairs, movers, cleaning and much more, which is included in implicit costs. This is normal. Because the owners of their own stores have profits that more than cover explicit and implicit costs, otherwise they would get rid of non-profitable property.
And the costs of the company can simply be reduced. Do not hire a seller, for example, so as not to spend money on his salary, but to trade yourself. Each company (not necessarily trading), in carrying out its activities, bears certain costs that may be associated with the purchase and repair of equipment and other production factors, as well as with the sale of products that have been produced. Valuation of all these costs is implicit costs. This is offset by the introduction of a cost-effective method of operation of the enterprise with minimizing costs. That is, the owner of a crockery shop can combine his work as a manager with the duties of a seller, a loader and a cleaner. It minimizes costs. Or introduce a much more innovative approach to housekeeping.
Types of Implicit Costs
Costs of production are expenditures on the production of services or goods directly. What is associated with implementation is distribution costs. Implicit costs are both the costs of the firm itself (individual) and the totality of costs in the process of production of the product. This includes the training of personnel and the protection of the surrounding area - a lot of costs, called public.
Further, the classification of costs relates specifically to each type. This will be a little further, since first you need to note those expenses that cannot be attributed to the main ones. Implicit costs are also additional expenses for bringing the manufactured products to the consumer. Here, for example, packaging, storage, packaging, transportation. Net distribution costs are the costs of acts of sale: salaries of sellers, including trade accounting, advertising and much more. They are called pure because they do not form a new value, but are deducted from the value of the goods.
Approaches to the essence
Explicit and implicit costs are considered from two different positions - accounting and economic. The accountant looks to the past, and the economist to the future.
- Accounting implicit costs are an estimate of the value of resources already used, and prices remain actual and equal to sales. Thus, a quantity appears called the cost of production.
- From the economist's point of view, implicit costs are a problem of limited resources and the calculation of their alternative use. By and large, all costs have the opportunity to become alternative.
The economist simply chooses the best option when using resources, designed for profit not today, but in the foreseeable future. Hence, it often turns out that economic costs exceed explicit and implicit. In the best case, the waste of a resource for the production of a product or service is equal to its value, but the most profitable use case is always used.The economic costs of the company are almost always greater than the accounting, because they are aggregate and alternative.
Classification
The economic costs, as already mentioned, are much greater than any others, and for classification, a certain starting point will be needed, the principle by which it will be carried out. For example, dependence on the payment of resources. According to this principle, all the costs of the economic plan are simply divided into two unequal parts.
- Explicit costs are external, that is, it is a waste of money that the company pays for service providers, fuel, raw materials, all kinds of auxiliary materials, transportation, and so on, when the suppliers are not related to owning the company. These expenses are necessarily reflected in the balance sheet and statements and therefore may relate to accounting costs.
- Internal (implicit) production costs are expenditures on a independently used own resource. In the company they are the equivalent of cash payments that could be received for a resource used independently, that is, the application will be the most optimal.
Return to the first example
Examples of implicit costs are numerous, but it is better to limit oneself to acquaintances already and consider it from different angles. So, we have the owner of a small store located in our own premises. Now, if it were not for the store, then it would be possible to lease this area for ten thousand rubles, for example. This monthly amount not received is a category of internal costs. And to add here also mythical wages, if the owner worked not for himself, but for another person, this would result in a sum of internal costs - considerable.
What keeps the shopkeeper from saying goodbye to his own business, we have already discussed. But extending analogies and concretizing them does not hurt. The minimum wage supporting activities in this business is called normal profit. That is, you need to plus not salary in a foreign company with the money received for rent, but add up the unearned income with normal profit, then what happens is considered to be internal (implicit) costs. Economists consider everything: both explicit and implicit costs, plus normal profit to them.
Wear
When capital resources lose their original value, this is called depreciation. The loss of technical and production properties by means of labor, otherwise, consumer qualities, is physical depreciation, and if the value of capital securities decreases, which is often not related to the level of consumer qualities, this is moral depreciation. The first causes an increase in efficiency in the production of capital goods, that is, there appear even cheaper, but similar new means of labor, with similar functions and more advanced ones.
Depreciation is a consequence of scientific and technological progress, which is an unpredictable increase in costs for the company: constancy leaves this process. With physical depreciation, expenses are variable: since capital equipment lasts significantly more than a year, its value is gradually transferred to finished products - the so-called depreciation. There is a special depreciation fund at enterprises.
Depreciation charge
These deductions reflect the assessment of the amount of depreciation and its value, so they are also an article of implicit costs. But the role of these contributions is beneficial, because only they will serve in the future as a source of renewal of capital goods. Depreciation rates established by law at the state level as a percentage of the depreciation cost per year. Depreciation shows how much time is needed to recover the value of all fixed assets.
According to the law of diminishing marginal returns, which is valid only for a short time and having a relative character, it is still possible to calculate that fateful reference point when the variable factors used additionally will not help keep production from decreasing or falling production growth. Even if only one factor fails - with all the others remaining unchanged - it will happen.
Sunk costs
Implicit costs can not be identified with the sunk costs that the company carries out once and can never return. For example, if the owner of our store spent a certain amount on a sign, then even when he sells his company, he will not return the money for its manufacture.
Also, the classification criteria can be the time intervals during which costs have occurred. Insofar as fixed costs production firms do not fully depend on prices of factors of production, part of the costs will depend on which of them are applied, when and in what quantity. Based on this, long-term and short-term periods in the activity of this company are classified.
Summary
- If the store owner subtracts all external (explicit) costs from the total revenue, then he will succeed accounting profit which does not take into account only internal (implicit) ones.
- If he subtracts the implicit (internal) costs from there, he will receive the amount of economic profit.
- But with all this, economic profit must take into account the costs of both.
- If the total revenue of the company is equal to the total costs, then appears normal profit Moreover, the minimum level of profitability of the enterprise is where the owner is profitable for his business, but the economic profit is also zero.
- The presence of net economic profit means that the company uses its resources efficiently.
- Economic profit less than accounting for the amount of all implicit costs, and yet it is precisely this criterion for the success of a firm or enterprise.
Production costs can be interpreted as spending on improving economic resources. This science itself offers only four criteria for evaluating factors of production. This is primarily labor, capital, land and entrepreneurial ability. If the owner of the store competently attracts these resources to his business, he will surely receive a secured income in four same ways: salary, rent, interest and profit.
