Question

Differentiate between real cost and money cost with the help of examples.

Answer 1

Real Cost	Money Cost
1. Real cost refers to the efforts and sacrifices made by the owners of factors of production used in the production of a commodity.	1. Money cost refers to money expenses which the firm has to incur in purchasing or hiring the factor services.
2. It includes the pain, sacrifice, discomfort and disutility involved in providing factor services required to produce a commodity.	2. These expenses include the money expenditures of a firm on wages and salaries paid to labour, payment of interest on borrowings, rental payments, payment for raw material.
3. The concept of real cost has no practical significance because it is a subjective concept that makes it difficult to estimate real cost.	3. Accounting books of a firm record these actual money expenses made by the firm on the factors of production as the cost of production.