Question

Generally speaking, the total cost of production differs from accounting cost because it:

a) Includes fixed and variable costs.
b) Excludes fixed costs.
c) Excludes variable costs.
d) Is always higher than accounting cost.

Answer 1

The total cost of production differs from accounting cost because it includes both fixed and variable costs, which encompass all expenses associated with producing goods or services.

Step-by-step explanation:

The question is related to how the total cost of production differs from accounting cost. In this case, the correct answer is that the total cost of production includes both fixed and variable costs. Fixed costs are costs that do not change with the level of production, such as rent or salaries, and they are considered sunk costs that should not affect future economic decisions. Variable costs, on the other hand, vary with the level of output and can exhibit diminishing marginal returns, meaning that as production increases, each additional unit of output becomes more costly to produce. Both these costs are factored into the total cost of production, unlike in accounting cost, which may treat some of these costs differently for financial reporting purposes.