Economic Versus Accounting Profit - Special Academic Support

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Introduction

Salesforce.com (CRM) is a company that provides business software to organizations based on the cloud computing platform. The revenue model is based on subscriptions. The company was founded in 1999 and is headquartered in San Francisco, USA. It is a publicly-traded corporation. The chief executives of the company are Marc Benioff, the Chairman, and CEO and the co-founder of the organization, and Parker Harris who is also the co-founder and Executive VP of Technology. The CFO, Principal Accounting Officer, and Executive VP of the company are Graham Smith. The main products of the company are sold in two brands Sales Cloud and Service Cloud.

Sales Cloud is for marketing and selling of enterprise software related to automation of the sales force. Services cloud is for providing a software solution for customer relationship management. Further, its Force.com brand provides application solutions on cloud computing to enterprises. Chatter is another platform that allows collaboration between people and data. Appexchange is a platform that allows the marketing of cloud computing applications.

Jigsaw is another service to the enterprises that provide 23 million cloud computing assisted business contact and information generator. Apart from these, the company provides various professional services like training, certification, etc. All these products are directed towards enterprise use, and therefore their marketing is done to enterprises. Companies incur various types of costs. One differentiation of cost is explicit and implicit cost and the other is a fixed and variable cost. This essay evaluates the different kinds of the cost incurred by the company and specific examples of the costs.

Cost types

Explicit Cost relates to those costs that a firm incurs by directly paying money. These costs are the only costs that are usually considered by accountants. The explicit costs that are incurred by CRM are the costs that are listed as the costs incurred by the company in their financial statement. These include items listed under Operating Expenses in the companys Income Statement that are expenses incurred due to Research and Development, Selling cost, administrative cost, non-recurring cost, interest expense, nonrecurring costs, and others. These costs are those for which CRM paid money and therefore are listed in the financial statement of the company.

Implicit Costs are the opportunity costs that are foregone during the operation of the company. These do not deal with money and are used in economics and not in accounting. Some examples of implicit costs that the company may incur are lost goodwill with their customers, as this would imply that their business would be affected and lessen their revenue and lost opportunity to tap on a new cloud-based product as this would mean that a business opportunity is lost.

Fixed costs are the costs that remain unaltered in the short-run. These are incurred by the company in the short-run even when there is no production. The fixed costs of CRM are long-term debt, deferred long-term liability charges, long-term investments, property and plant equipment, and long-term asset charges. These are fixed in the short run but vary in the long-term.

The variable costs are those that vary with the change in the production level. The variable costs incurred by CRM are wages paid to the employees, administrative costs, production costs, etc. however, it must be understood, that all costs including the fixed cost become variable in long run.

Conclusion

As CFO of the company, one must differentiate between the economic and accounting profit. For instance, the accounting profit incurred by CRM in 2010 is $80,719 thousand. However, if we consider the implicit cost of the foregone interest earning on interest earned on the invested money if it was lent out or the use of the company properties for the purposes through which it could earn money then if these are added as implicit costs, would reduce the accounting profit of the company considerably. Therefore, the CFO would aim to have accounting and economic profit at the same level.

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