Presented to Moraine Park Technical College Prepared by: Joe Halter Operating Cost versus Opportunity Cost

Presented to Moraine Park Technical College

Prepared by:

Joe Halter

Operating Cost versus Operating Cost versus Opportunity CostOpportunity Cost


Learning OutcomesOperating Cost versus Opportunity Cost

Define Operating Cost and Opportunity Cost.Define Operating Cost and Opportunity Cost.

Define Explicit Cost and Implicit Cost.Define Explicit Cost and Implicit Cost.

Discuss examples of operating cost and opportunity Discuss examples of operating cost and opportunity cost.cost.

Demonstrate the difference between operating cost Demonstrate the difference between operating cost and opportunity cost.and opportunity cost.

Compare the concepts of Accounting and Economic Compare the concepts of Accounting and Economic cost.cost.

Demonstrate understanding of Operating Cost versus Demonstrate understanding of Operating Cost versus Opportunity Cost by completing Sugar Shack exercise Opportunity Cost by completing Sugar Shack exercise for grade.for grade.


Economic Cost

• The key concept underlying the computation of The key concept underlying the computation of economic cost is the concept of opportunity economic cost is the concept of opportunity cost.cost.

• In economics, the notion of a firm’s costs is In economics, the notion of a firm’s costs is based on the notion of economic cost.based on the notion of economic cost.

Concept of Opportunity Cost

The opportunity cost of something is what you The opportunity cost of something is what you must sacrifice to get it.must sacrifice to get it.


Operating Cost versus Opportunity Cost

• Operating Cost or Explicit CostOperating Cost or Explicit Cost are outlay costs are outlay costs associated with either purchasing or hiring associated with either purchasing or hiring resources that the business needs to operate.resources that the business needs to operate.

• Implicit CostImplicit Cost are costs associated with resources are costs associated with resources owned by the business itself.owned by the business itself.

• Operating Cost = Explicit CostOperating Cost = Explicit Cost

• Opportunity Cost = Explicit + Implicit CostOpportunity Cost = Explicit + Implicit Cost



• Raw materialsRaw materials

• LaborLabor

• ElectricityElectricity

• FuelFuel

• MaintenanceMaintenance

• TaxesTaxes

• Interest paymentsInterest payments

• Phone servicePhone service

• Rental charges to a plant.Rental charges to a plant.

Examples of Operating CostExamples of Operating Cost



• LandLand

• BuildingsBuildings

• MachinesMachines

• Labor contributed by the owner's of the Labor contributed by the owner's of the business.business.

Examples of Implicit CostExamples of Implicit Cost


Accounting Versus Economic Cost

• An accountant’s idea of costs involves only the An accountant’s idea of costs involves only the firm’s operating costs or explicit costs.firm’s operating costs or explicit costs.• Operating or Explicit cost:Operating or Explicit cost: the firm’s actual cash the firm’s actual cash

payments for its inputs.payments for its inputs.

• An economist includes the firm’s opportunity or An economist includes the firm’s opportunity or implicit costs.implicit costs.• Implicit cost:Implicit cost: the opportunity cost of nonpurchased the opportunity cost of nonpurchased

inputs.inputs.

• Economic cost:Economic cost: the sum of explicit cost plus the sum of explicit cost plus implicit cost.implicit cost.


Accounting Versus Economic Cost

Accounting Versus Economic CostAccounting Versus Economic Cost

AccountingAccounting

CostCost

EconomicEconomic

CostCost

Operating or Explicit Cost (purchased inputs) $60,000 $60,000

Implicit: opportunity cost of entrepreneur’s time 30,000

Implicit: opportunity cost of land 10,000

_______ ________

Total Cost $60,000 $100,000

Documents

Presented to Moraine Park Technical College Prepared by: Joe Halter Operating Cost versus Opportunity Cost