Question

a) Define and give examples on the following: PLEASE DO NOT FORGET TO GIVE EXAMPLES AND DEFINE EACH

                        (1) opportunity cost

                        (2) implicit cost

                        (3) explicit cost

                        (4) historical costs

                        (5) current costs

THANK YOU!!!

Answer 1

As per the HOMEWORKLIB POLICY, answering the first four parts

(1)

Opportunity cost is the cost of next best alternative forgone. For example, if a person A spends time on watching a movie of 3 hours, then A cannot spend that time writing a note or something else. Here, writing a note is the opportunity cost of person A that he/she has to forego in order to watch a movie.

(2)

Implicit Cost: Implict costs are those costs which are incurred when a firm uses uses owner's resources like capital, machines, equipment etc. They are also known as imputed cost. These are the costs that results from using an asset.

For example, the owner of the firm puts considerable amount of time in the maintenance of the firm. This time could have been utilized on something else like expanding the business etc.

(3)

Explicit Cost: They are known as paid - out costs. They refer to those expenses which are paid by the firm. For example, cost of purchasing raw material, wages and salaries of the worker.

(4)

Historical Costs: Historical costs are those costs in which the asset value in the balance sheet of the firm is recorded at its original cost.

For example, a building was bought in 1993 in $1 million whose current cost is $10 million. So, $1 mn is the historical cost which is to be recorded in the balance sheet.