Business and Their Costs
Chapter Six
Businesses and Their Costs
Study Questions:
1. Explain the difference between a plant, a firm, and an industry.
Plant – establishments such as a factory, farm, mine or store.
Firm – an organization that employs resources to produce goods/services for profit.
Industry – group of firms that produce the same or similar products.
2. State the advantages and disadvantages of the corporate form of business.
Advantages – most effective form of business organization for raising money to finance the expansion of its facilities and capabilities. Corporations finance the expansion of its facilities and capabilities. Corporations provide limited liabilities to owners.
Disadvantages – the owners of a corporation lose direct control and do not manage the corporation
3. Describe the principal-agent problem.
Principles (stockholders) hire executives (agents) to run the business. These interests in the corporation do not always coincide. And conflicts of interest may develop
4. (a) Distinguish between explicit and implicit costs, and (b) between accounting, normal, and economic profits.
a) A firm’s explicit cost are the monetary payments (or cash expenditures) it makes to those who supply labor services, materials, fuel, transportation services, and the likes. Such money payments are for the use of resources owned by others. A firm’s implicit costs are the opportunity costs of using its self-owned, self-employed resources. To the firm, implicit costs are money payments that self-employed resource could have earned in their best alternative use.
b) Economic profit is total revenue less economic costs. Normal profit is the cost of doing business, or the revenue remaining after all costs have been paid. To accountants, profit is the firm’s total revenue less its implicit costs.
c) Explicit costs are considered by the accountants, implicit costs are not considered by the accountant.
Businesses and Their Costs
Study Questions:
1. Explain the difference between a plant, a firm, and an industry.
Plant – establishments such as a factory, farm, mine or store.
Firm – an organization that employs resources to produce goods/services for profit.
Industry – group of firms that produce the same or similar products.
2. State the advantages and disadvantages of the corporate form of business.
Advantages – most effective form of business organization for raising money to finance the expansion of its facilities and capabilities. Corporations finance the expansion of its facilities and capabilities. Corporations provide limited liabilities to owners.
Disadvantages – the owners of a corporation lose direct control and do not manage the corporation
3. Describe the principal-agent problem.
Principles (stockholders) hire executives (agents) to run the business. These interests in the corporation do not always coincide. And conflicts of interest may develop
4. (a) Distinguish between explicit and implicit costs, and (b) between accounting, normal, and economic profits.
a) A firm’s explicit cost are the monetary payments (or cash expenditures) it makes to those who supply labor services, materials, fuel, transportation services, and the likes. Such money payments are for the use of resources owned by others. A firm’s implicit costs are the opportunity costs of using its self-owned, self-employed resources. To the firm, implicit costs are money payments that self-employed resource could have earned in their best alternative use.
b) Economic profit is total revenue less economic costs. Normal profit is the cost of doing business, or the revenue remaining after all costs have been paid. To accountants, profit is the firm’s total revenue less its implicit costs.
c) Explicit costs are considered by the accountants, implicit costs are not considered by the accountant.