Concepts of Cost

Concepts of Cost

Q 1:

The main conceptual difference between economic and accounting costs is that economic costs are forward-looking while accounting costs are retrospective. The analysis of economic costs mainly focuses on the expected future costs and the planning by the organization to manage its resources to attain reduced costs and improved profitability (Bade & Parkin, 2015). On the other hand, the analysis of accounting costs mainly focuses on the recorded costs. The accountant evaluates the firm’s past performance to keep track of its assets and liabilities. Unlike the analysis of economic costs, changes in the opportunity costs do not influence changes in the accounting costs.

Q 2:

Product differentiation is an important value-creation activity, which enhances an organization’s competitiveness and profitability. I would manage the costs of this activity by identifying the optimum location for the value creation activity. For example, assembling smartphones in China would produce low production costs, which would give the company the option to use differentiation to increase the sales volume for smartphones (Hill, Jones, & Schilling, 2014). This approach would give an organization considerable cost advantages in comparison to the option of designing and assembling the smartphones in U.S.

Q 3:

            The main objective of controlling an organization’s operation costs is to keep the expenses at their lowest level while improving the profit margin. An organization must align its strategy with its operational costs to attain various profit and growth goals. The strategy should minimize the operational costs while maintaining the desirable quality of products and services. For example, labor offshoring allows an organization to optimize the utilization of cheap and readily available labor. Such a strategy allows an organization to reduce its labor costs, which translates into increased profit margins.

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