Cost Variance: Accounting vs. Economic

Accounting Costs - Complete Controller

Businesses face several accounting costs that can easily be identified and calculated when conducting day-to-day business operations. Companies, however, also face other economic costs that are not displayed on the bookkeeping records and have a significant impact on the decisions made by management. Accounting costs are crucial for the company’s external and internal reports. At the same time, economic costs apply to the internal sector only.Cubicle to Cloud virtual business

Implicit Costs

Economic costs reflect a company’s implicit and explicit costs during the year. Implicit costs are linked to resources offered to a company without any price tag. If a company operates from a building it owns, it encounters an implicit cost due to the rent that could have been earned by leasing the building to some other company. The owner could have earned around $3,000 monthly from a commercial renter. Therefore, in this case, the company faces an implicit cost of $3,000, referred to as its economic cost.

Explicit Costs

Accounting costs are generated from the overall explicit costs of a business throughout the fiscal year. They do not include the implicit costs coming from unused resources. Explicit costs defined by their monetary value are included in a business’s accounting costs to identify the net income.

CorpNet. Start A New Business NowExplicit business costs include the following:

  • Salaries, wages, bonuses, commissions, and any other form of compensation dispensed to company employees
  • The cost of benefits provided to employees, such as insurance
  • Material costs – Refers to any materials that a company must purchase to produce the products and services that it sells
  • Marketing and advertising costs
  • Rent or mortgage payments on company facilities
  • Utilities, such as electricity and internet service
  • The costs of purchasing, using, and maintaining equipment that a company requires to operate, such as manufacturing machines or vehicles
  • Taxes, insurance, legal fees, etc.
  • Depreciation

Accounting Profit

If an accountant or bookkeeper wants to calculate the financial year’s accounting profit, they only have to look at its profit and accounting costs. The accountant can form an income statement for the company without the economic cost details. For instance, accountants have no concern that the company could have made $3,000 by leasing the building to some other business, making around $36,000 during the financial year. This $36,000 has nothing to do with the company’s gross profit during the financial year.

ADP. Payroll – HR – BenefitsEconomic Costs are not Included in Bookkeeping

Economic costs are not written or mentioned in a company’s accounting records or bookkeeping. When creating financial reports, accountants are focused on the explicit costs generated from the business operations conducted throughout the financial year.

However, Economic costs are generally considered when a company has to make strategic decisions involving opportunity. For example, suppose a company has intended to close down an operational location and rent or lease it out to another business. In that case, the company needs to consider the economic costs of losing the money generated from business operations or the profit generated from the rent.

Economic cost generally comprises the monetary value of resources the business employs. Also, it links to the opportunity cost that arises from the enterprise’s inputs to make the business functional.

On the other hand, accounting costs are focused on explicit costs incurred by the business. Any company’s costs in normal, day-to-day market transactions are referred to as explicit costs. One common example of explicit costs includes wages that are given to employees. The money spent buying the resources the business needs is also known as explicit costs.

While the economic cost may not be included in the company’s bookkeeping and, therefore, would not be the bookkeeper’s responsibility, it is recommended that you hire an accountant to handle all financial aspects of the company. A certified accountant would manage all financial bookkeeping operations and the company’s economic costs.

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