Management Accounting

Question no: 01:-
Accounting profit and Economic profit.
Economic Profit
Implicit cost
Accounting profit

Explicit cost
Total opportunity cost
Revenue
Revenue
How an economist views a firm
How an accountant views a firm
Accounting profit equals sales revenue minus ( - ) all costs except the cost of equity capital, while Economic profit is sales revenue minus ( - ) all costs including the opportunity cost of equity capital. Thus economic profit may be lower than the accounting profit. If accounting profit equals the opportunity cost of equity capital, economic profit is zero. Only when accounting profit is greater than the opportunity cost of equity of capital, economic profit is positive, Under perfect competition all the firms in the long run earns zero economic profit.

Explicit cost

* Normal profit is the minimum level of profit that keeps the factors of production in the long run * Profit maximization can only happen when the marginal revenue or price is equal to the marginal cost and marginal cost is increasing.

a. Bowmen’s Accounting profits is equal to (total revenue – explicit costs)

| $ | $ | Revenue | | 500000 | | | | (-) Explicit costs | | | Variable operating cost | 4500000 | | Accounting depreciation | 40000 | | wages | 50000 | (4590000) | Operating income | | 410000 | (-) interest expenses | | 400000 | Accounting Profit | | 10000 |

b. Bowmen’s’ Economic profits = Total Revenue – (explicit costs + implicit costs)

| $ | $ | $ | Revenue | | | 5000000 | | | | | (-) Explicit costs | | | | Variable operating cost | 4500000 | | | Actual depreciation | 60000 | | | wages | 50000 | | | Interest expenses | 400000 | 5010000 | | | | | | Implicit expenses | | | | Incomes | 30000 | | | Interest incomes | 94000 | 124000 | -5134000 | Economic profit loss | | | -134000 |

Interest