Examples of explicit costs in the following topics:
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- Opportunity cost refers to the value lost when a choice is made between two mutually exclusive options.
- Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen).
- Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility are also considered implicit. or opportunity, costs.
- The opportunity cost of having happier children could therefore be a remodeled bathroom.
- There are explicit costs on the line, such as the capital necessary to start a business, purchase of all the inputs, and so forth.
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- The cost of an externality is a negative externality , or external cost, while the benefit of an externality is a positive externality, or external benefit.
- Those who suffer from external costs do so involuntarily, while those who enjoy external benefits do so at no cost.
- A voluntary exchange may reduce total economic benefit if external costs exist.
- The person who is affected by the negative externalities in the case of air pollution will see it as lowered utility: either subjective displeasure or potentially explicit costs, such as higher medical expenses.
- Here, overall cost and benefit to society is defined as the sum of the economic benefits and costs for all parties involved.
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- As a stand-alone tool to compare an investment to "doing nothing," payback period has no explicit criteria for decision-making (except, perhaps, that the payback period should be less than infinity).
- For example, a compact fluorescent light bulb may be described as having a payback period of a certain number of years or operating hours, assuming certain costs.
- Here, the return to the investment consists of reduced operating costs.
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- As a stand-alone tool to compare an investment, the payback method has no explicit criteria for decision-making except, perhaps, that the payback period should be less than infinity.
- The payback method is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing or other important considerations, such as opportunity cost.
- While the time value of money can be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation.
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- As a management tool, this metric makes explicit the interrelatedness of decisions regarding inventories, accounts receivable and payable, and cash.
- Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above.
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- Information costs influence the bond prices and interest rates.
- We include these costs in the bond's market price and interest rate, and they raise the cost of borrowing.
- Investors pay a greater cost to acquire information for the high information cost bonds.
- Thus, investors are attracted to the low-information cost bonds, boosting their demand for low information cost bonds, increasing the market price and decreasing market interest rate.
- Therefore, low-information-cost bonds pay a lower interest rate.
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- Sunk costs are retrospective costs that cannot be recovered, and are therefore irrelevant to future investment decisions in the project which incurs them.
- Sunk costs are retrospective costs that have already been incurred and cannot be recovered.
- Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken .
- The sunk cost is distinct from economic loss.
- The sunk cost may be used to refer to the original cost or the expected economic loss.
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- Economic order quantity is the order quantity that minimizes total inventory holding costs and ordering costs.
- This is not the cost of goods), H = annual holding cost per unit (also known as carrying cost or storage cost) (warehouse space, refrigeration, insurance, etc., usually not related to the unit cost).
- Total Cost = purchase cost + ordering cost + holding cost
- Purchase cost: This is the variable cost of goods: purchase unit price × annual demand quantity.
- Ordering cost: This is the cost of placing orders: each order has a fixed cost S, and we need to order D/Q times per year.
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- Cost of goods sold (COGS) refer to the inventory costs of the goods a business has sold during a particular period.
- Costs include all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.
- Costs of payroll taxes and employee benefits are generally included in labor costs, but may be treated as overhead costs.
- Determining overhead costs often involves making assumptions about what costs should be associated with production activities and what costs should be associated with other activities.
- Activity based costing attempts to allocate costs based on those factors that drive the business to incur the costs.
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- The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
- The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
- This happens due to the fact that marginal cost of capital generally is the weighted average of the cost of raising the last dollar of capital.
- Since the cost of issuing extra equity seems to be higher than other costs of financing, we see an increase in marginal cost of capital as the amounts of capital raised grow higher.
- The Marginal Cost of Capital is the cost of the last dollar of capital raised.