What is opportunity cost of production?

Production costs are a group of expenses, as well as financial expenses necessary to create a product. When, as a result of the sale of goods, the producer receives money, a certain amount must be spent on compensation, the other part becomes profit.

What is opportunity cost of production?

The main part of production costs is the use of a certain list of resources for the production of goods. It should be understood that resources used in one place cannot be used in another. For example, the money spent on a pizza oven cannot be spent on pizza products. This kind of resource has properties such as limited and rare.

Roughly speaking, if one resource begins to be used in a certain field, then it simply loses the ability to be used in some other area of ​​activity.

It follows from this that at the beginning of the production of certain products, a complete rejection of the use of the same resources in another field of activity is required.

It is these resources that are commonly called “opportunity costs of production”. It is important to take them into account during the analysis of any work.

The alternative costs of production are called any costs for the production of a particular product, which can be estimated from the point of view of the lost possibility of their use in another area and for another purpose.

Alternative production costs include:

1. The costs of the lost opportunity to produce goods and services.

2. Imputed costs.

3. The costs of rejected opportunities.

What is usually included in opportunity costs of production

The opportunity cost of production is usually measured in monetary terms. They are determined by the difference between the profit that the organization could receive with the most rational use of available funds and the actual income received.

But there are also costs that are not allowed to be called opportunity costs. Those costs that are incurred by the enterprise in an unconditional order cannot be called alternative. These costs include renting a room, paying taxes and more. When making decisions of an economic nature, such costs are not analyzed.

What are implicit production costs?

Implicit costs of rejected opportunities are usually called only those production costs that are owned by the organization. Implicit costs are not billable costs.

Such costs can be defined by the following concepts:

1. Profit defined by the entrepreneur as the minimum remuneration that can make him stay in a certain field of activity. Example. A man is engaged in the sale of rabbit meat. And he believes that the profit, which is at the level of 16% of the amount that he invested in the production process, is normal. But if, as a result of production, the constant profit is slightly lower, then he will have to transfer his capital to a new sphere in order to receive later the profit normal in his opinion.

2. Finances that a person could receive if he used the resources available on the balance sheet in another, more profitable area. This also includes wages that a person could receive while working in another area of ​​employment.

3. There is a law for the costs of implicit production, the essence of which is that the costs for the owner can also be the profit that he could get by defining his capital for another task. For example, a person who has land at his disposal may have such implicit opportunity costs as rent, provided that he did not use the land on his own and rent it out.

If you rely on Western economic theory, it turns out that the opportunity cost of production includes the entrepreneur’s income, considered as payment for risks. At the same time, this fee is a reward, as well as an incentive to keep their assets in the form of finance in the current enterprise, without redirecting them to another production process.

What are sheer production costs?

Explicit alternative production costs are the money that has been paid to suppliers for providing the necessary production factors that are required to organize the process as a whole and its intermediate stages.

In particular, it is customary to note the following obvious production costs:

1. The cost of any transportation costs.

2. Payments necessary for the purchase or rental of a building, machinery, machine tools, structures and other equipment necessary for the creation of goods.

3. Salaries of workers involved in the production process.

4. Communal payments.

5. Payments for the acquisition of resources from suppliers.

6. Payments to banks and insurance companies for the provision of their services.

What is the difference between economic costs and accounting

Those costs in production, which, among other things, consist of average or normal profit, are called various economic costs. Such costs are temporary and, based on modern economic theory, are considered to be those costs that are realized if the most profitable economic decision is chosen. Thus, it turns out that this is exactly the feature that any entrepreneur must strive for. But as a result of the fact that such an ideal is difficult to access in modern practice, the real picture of total production costs looks somewhat different.

It is important to understand that economic costs are not accounting. For any operations in accounting, an indicator such as the production capability curve is used.

In economic theory, alternative costs of production are used, which differ from accounting in the possibility of estimating internal costs.

For a more illustrative example, you can imagine the production of grain. A part of the crop should be left by the producer in order to sow the plantation in the future. Thus, it turns out that the grain produced by the enterprise will be used by him for his internal needs. And this amount of grain is not paid.

When accounting, internal costs must be accounted for at cost. But, if you evaluate the goods received from the pricing side, then this grain or other similar opportunity costs of production should be estimated at market value.