Question

When materials are stored in inventory for a period of time before being used in the production process, the accounting cost and economic cost differ if the market price of these materials have changed from the original purchase price. Accounting cost is equal to the actual acquisition cost and economic cost is equal to the current replacement cost.

which cost do you feel the U.S. Car industry (GM, Ford, etc.) is most affected by – accounting or economic cost?: Need 300 words

Answer 1

When we talk about accounting cost and economic cost, both have almost similar meaning but the only difference is accounting cost only include explicit cost while economic cost include both i.e. explicit and implicit cost both.

If the time period between the purchase of material and production process increases, it is but natural that the original price of material and market price of material must have change due to constant change in the prices of materials.

Accounting cost will be very much helpful to measure the wealth of the business. It will help the business to determine from where the money will come and where the money is issuing from the business.

When we talk about the US car industry economic cost is most affected rather than the accounting cost. The reason behind that is, accounting cost is the cost of acquisition of materials. Now when any US car manufacturer us purchasing the material than it is obvious that they will use this materials for the production purpose only. They will try to use all the inventory on the spot as and when they need the material for manufacturing of car. So it is for sure that accounting cost will not bother the car industry much.

Now the question leave us with the economic cost which is equal to the current cost of replacement. After the final product of US car industry is ready with the company and it will not going to sell immediately than the storage cost will going to increase. They have to incurred the storage cost which is part of economic cost. The longer it will be with the storage house of the company the higher will be the economic cost of the company.

So according to my feelings the economic cost is affecting a lot when we talk about the US car industry like GM or ford.