AuthorTopic: Economic Cost vs Accounting cost
@2014-08-22 06:18:26
I came across this problem and was wondering if you could help me with its solution:

1. Jagdish quits his computer programming job, where he was earning a salary of Rs. 5,00,000 per year to start his own computer software business in a building he owns and was previously renting out for Rs. 2,40,000 per year. In his first year of business he has the following expenses:

Salary Paid to himself: Rs. 4,00,000

Rent: Rs. 0

Other expenses: Rs. 2,50,000.

Find the accounting cost and the economic cost associated with Jagdish’s computer software business.
@2014-08-27 21:57:08
Well the two economic costs are the rent he could be getting from somebody if his start up didn’t occupy his building, and also the salary he is forgoing to work at his start up. The rest of the costs should be accounting.

Forgone rent + difference between new salary and old = economic costs

CFA Discussion Topic: Economic Cost vs Accounting cost

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Edward Liu

Edward Liu