After labor and cloud charges, a proposal looks like it has money left over. But the owner will spend several more days fixing the work. If those days could have gone to another job, have we counted what we give up when we call this one worthwhile?
A factory using its own space faces the same question. It pays no monthly rent for that space, but it could lease it out or use it for another production line. Here I separate different dimensions of cost so we can choose the right numbers for the question before adding them into one table.
Cash obligations and the cost of a forgone choice
Explicit costs are resources a business has an obligation to pay for, such as salaries, subcontractors, materials, and rent. Implicit costs are the value of resources the business or owner uses without paying an outsider for that particular use, such as the opportunity cost of the owner's time or space.
No cash payment for an item does not mean that using the resource has no opportunity cost. Identify a feasible alternative and the net benefit given up. Do not assign a value merely to make a cost table look complete.
Accounting also records expenses whose cash is paid at another time, such as accrued expenses or depreciation. “Accounting cost” should not be used to mean only money transferred today. This section separates ways of thinking; it is not advice on recognizing a particular item under an accounting standard.
Fixed and variable costs answer another question
A fixed cost does not change with output within a stated period or capacity range. A variable cost changes with that output. This distinction does not map one-to-one onto explicit and implicit costs. Rent that is actually paid can be both an explicit and a fixed cost.
Regular staff salaries may be fixed for next week's decision to accept more work. If delivery under the contract requires another team, costs rise in a step. Cloud service may have a base charge plus a usage-based part, so do not label an entire bill variable without looking at its terms.
A factory's rent may be fixed this month, materials may change with each unit, and setup costs may recur for every batch. Several small batches do not necessarily cost the same as one large batch just because they contain the same total number of units.
Scroll the table left and right to read every column.
| Example item | What to specify | Before deciding on added work |
|---|---|---|
| Regular salary | The month, available staff, and spare capacity | Will salary change, and what other work will the new job displace? |
| Cloud service | Minimum fee, actual use, and pricing thresholds | Will the new job raise use or cross a pricing tier? |
| Materials and scrap | Per good unit or per unit started | Are wasted materials and recoverable value included? |
| Owner's space | Feasible alternative use or lease | Add the net benefit forgone only if it is not already counted. |
| Machine setup or system preparation | Per event, batch, or project | Count the extra setups the new work causes. |
This table does not set accounting policy for every business. The same item may behave differently with another contract, period, or production level. “Fixed” always needs a defined boundary.
A software project that calls for valuing the owner's time
Suppose a company considers an integration job paying THB 90,000. The job causes THB 30,000 of additional expenses and takes 20 hours of the owner's time. Ignore taxes and assume the payment and additional expenses are certain so we can focus on opportunity cost.
The best feasible use of those same 20 hours is another design-review job yielding THB 24,000 after its own additional expenses. The two jobs cannot be done at the same time, and the owner's time is not already included in the THB 30,000 expense figure.
The new job leaves THB 90,000 - THB 30,000 = THB 60,000 before existing overhead. After subtracting the THB 24,000 opportunity cost, it has a THB 36,000 advantage under these assumptions. Neither number is the company's net profit because not all expenses for the accounting period have been deducted.
If the new job requires 40 owner hours instead of 20, we cannot reuse the same opportunity cost. We need to ask what the additional 20 hours displace and whether added expenses change. A precise formula cannot rescue an inaccurate estimate of the resources required.
If the THB 30,000 already includes compensation for, or the value of, the owner's time on the same basis, check whether that amount overlaps the THB 24,000. Opportunity cost is not a license to add hypothetical wages on top of an existing cost every time.
Average cost gives an overview; marginal cost informs the next job
Total cost is fixed cost plus variable cost. Average cost per unit is total cost divided by output. Marginal cost is the change in total cost divided by the change in output. Use the same output unit and period before calculating.
Suppose a factory makes one standard part in a month. Fixed cost is THB 40,000, and materials and other variable costs are THB 60 per good unit, with an allowance for scrap included in that rate. At 1,000 good units, total cost is THB 100,000 and average cost is THB 100 per unit.
If there is spare capacity and the factory can make another 100 units without another setup, overtime, or other added costs, that batch costs THB 6,000 more, or THB 60 per good unit. New total cost is THB 106,000; divided by 1,100 units, average cost is about THB 96.36 per unit.
Average cost falls here because the fixed cost is spread over more units. That is not yet evidence of long-run economies of scale: the factory still uses the same capacity and machines. If the new batch requires a THB 3,000 setup, the added batch cost immediately becomes THB 9,000.
Build the cost table for the decision at hand
For a software house or Odoo Partner, I would separate expenses caused by accepting the job from those the company bears anyway. I would record expert time, testing, support obligations, and opportunity costs not yet included. I would not use the average from projects of different sizes to claim that every project has the same unit cost.
A manufacturer should show spare capacity, good units, changeover time, and materials conditions alongside the figures. If machine hours are the constraint, put cost per unit and resource use per unit in separate columns. Otherwise, a product that appears attractive per unit may consume the entire shift.
Relevant costs are what differ between the future options. Full cost is still needed to see whether pricing and the business model can sustain the company over time. Use each measure for the question it answers.
Before sending a table to an approver, trace each cell back to a contract, work hour, or production unit. If you cannot say which choice causes an item, mark it for checking. Do not fill in a number just to make the table look complete.
Episode 4 compares these costs with the revenue from added work and separates profit in each framework from cash needed before the customer pays.
Common questions
If regular salary does not increase, does a new job have no added labor cost?
Salary may not rise during that period, but time is still limited. Check displaced work, overtime, and capacity in later steps. A job that fits genuine spare capacity is different from one that crowds out more valuable work.
Must opportunity cost always be added to expenses?
No. Check whether the original cost already includes the alternative's value and whether that alternative is actually feasible. Add only the relevant portion not yet counted, so the same resource is not charged twice.
Sources used to check the concepts
This episode distinguishes explicit, implicit, fixed, variable, average, and marginal costs. OpenStax 7.1 and 7.3 below provide further definitions. The figures and software, SI, Odoo Partner, and manufacturing examples are assumptions I created, not research findings or cost data from any organization.
Read OpenStax 7.1 on explicit and implicit costs and profit and OpenStax 7.3 on short-run costs
