A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.

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Alvin Green

Business

14 August, 18:53

A key difference between accountants and economists is their different treatment of the cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.

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Terrance Herman · Answer 1

Answer: lower

Explanation: Economists take a forward looking approach and identify costs that the organisation can incur in the future, and how the organisation will align itself to cover this costs and maximise profits. So they include the potential interest income on cash that is sacrificed, if this cash was not invested in the business. This is known as the opportunity cost. Opportunity cost is the benefit that is given up, by choosing one option over another.

However accountants do not include these potential figures. This is because accountants view the pure costs of the organisation, as they have actually been spent. Thereby evaluating past performances in the organisation and tracking their assets and liabilities.

These differences in recording will thus cause the accountant's estimate to be lower than the economist's estimate.