Accounting cost
For the family to run the business demand, they have to observe the factors that impact the net profits. The factors affecting the net profits include accounting costs and economic costs. Accounting costs refer to the actual monetary costs (expenses) documented on the books of accounts. The accounting costs are the specific cost (Mankiw, 2017), also referred to as hard costs that are withdrawn from the bank to run the family business. This includes production costs, lease payments, payroll, and marketing budgets (Leonard, 2019). These are the costs that are used in manufacturing, marketing, and distributing their goods. These are real-time costs subtracted from the revenues within a stated period of accounting.
Accounting cost = total actual expenses the family incurred
Accounting cost = 25,000 + 40,000 + 25,000 = $90,000
The family's accounting cost is $90,000.
Economic cost
Economic cost focuses on gains and losses of one of the actions taken over the other, and this is in terms of money and resources (Mankiw, 2017). This incorporates the opportunity cost as opposed to accounting costs, which includes the only expenses. The opportunity cost is the amount of profit the family would have received if they had chosen the course of action (Leonard, 2019). They didn't receive the amount because they went for another option.
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Economic cost = Accounting cost + opportunity cost
= 90,000 + 20,000 = $110,000
Therefore the family's economic cost is $110,000.
The reason why the family's economic cost is more than the accounting cost
The economic cost is more than the accounting cost (Mankiw, 2017). The accounting costs are costs that the family uses to produce. On the other hand, the economic cost does not only involve the amount used to produce the goods and services but also the forgone opportunity, usually referred to as the opportunity cost. Even in our scenario, there is a fixed implicit cost; that is why the economic cost is more than accounting cost.
References
Leonard, K. (2019, January 31). The difference between Accounting Cost & Economic Cost. Retrieved March 14, 2020, from Chron: https://smallbusiness.chron.com/differences-between-accounting-costs-economic-cost-26153.html
Mankiw, G. (2017). MindTap economics for principles of economics (8th ed.). Boston, MA: Cengage.
