Agriculture Reference
In-Depth Information
An explicit cost involves payments made to suppliers of resources, such as land, labor,
materials, fuel, and the like. Explicit costs are usually measured by an accountant. But fi rms
do not pay for all resources used in production. For example, a farmer does not write a rent
check to himself or herself for land that they own. A new food business may not have to pay
property taxes for fi ve years as part of an economic development incentive provided by the
county government. Since there was no cash outlay for use of the resource, economists
access an implicit cost associated with that use.
Since the accountant cannot precisely measure the expenditure of the opportunity cost,
they do consider it in the calculation of accounting profi t. Economists force an examination
of both explicit and implicit costs. The economist feels in the long run all costs must be
considered to analyze alternative courses of action. An example can clarify.
Susan Lambert owns and operates her own landscaping fi rm. She is a 31-year-old, with a
college degree, and she has been quite satisfi ed with her business. Susan's business operates
in a warehouse owned by her parents. She currently has $400,000 of her own money invested
in the business. Susan draws an annual salary of $35,000. They are letting her use the
building rent free as she gets her business started. Her parents could earn $25,000 if they
rented it to someone else.
Last year her business had total revenues of $335,000 (
Table 3.1)
. She gave her account-
ant various receipts for payments for plants and materials, labor, utilities, taxes and
insurance, and her draw for salary. Since the accountant can measure all of these costs,
the total explicit costs were calculated to be $260,000. Accounting profi t is then the total
revenue of $335,000 minus explicit costs of $260,000, equaling $75,000.
Plate 3.1
Landscaping
Determining the optimal use of specifi c inputs is an important decision for agribusiness managers.
Photo courtesy of USDA Natural Resources Conservation Service.
