Implicit and Explicit are two different types of costs a business deals with. It is important to know the difference between these costs and how they affect your business. The key difference between them is the type of transaction they deal with.
Implicit Cost vs Explicit Cost
The main difference between implicit cost and the explicit cost is that Implicit cost refers to the value of a firm forgoing a factor of production. This type of expenditure consists of a company’s expenses to convert raw materials into finished products. While on the other hand, explicit costs refer to the amount that a firm pays to third parties for inputs.
Implicit costs are not measured in cash. Instead, they refer to the expected loss of revenue and value. It is an opportunity cost, which does not have a monetary price. They have no monetary value. They refer to time, actual labor, or any other components that are necessary to produce the products and services.
Explicit costs are expressed in money and can be viewed through invoices or quotations to see the cost of buying them. They are tangible goods that a company must buy. An explicit cost is an expense the company must pay to get goods and services.
Comparison Table Between Implicit Cost and Explicit Cost
| Parameters of Comparison | IMPLICIT COST | EXPLICIT COST |
| Meaning | Implicit Cost is the cost of costs that do not require cash outlay. | Explicit cost refers to costs that involve cash outflows due to production factors. |
| Alternatively known as | Imputed Costs or Opportunity costs. | Out-of-pocket Costs |
| Occurrence | Implied | Actual |
| Recording and Reporting | No. Implicit costs are hard to determine. They are not recorded. | Yes, explicit costs are stored in balanced sheets. |
| Profit Calculation | Economic Profit can be calculated by implicit costs. | Accounting Profit and Economic Profit can be calculated by explicit costs. |
What is Implicit Cost?
In economics, the term “indirect cost” is used to describe the “opportunity cost” that a firm incurs when a competing firm uses its factor of production. Implicit cost is the opposite of “explicit cost,” which is borne directly by the firm. Implicit costs, on the other hand, are the result of a firm’s decision to use a factor in production that it does not own.
The term “implicit” means that something is not explicitly stated. An example of this would be a dirty look from a wife when her socks fall on the floor. This would be a “hidden” cost. While these costs are unrecorded, they are still considered a form of indirect cost. Without a thorough comparative analysis that estimates the overall impact of each scenario, it is impossible to calculate implicit costs.
Explicit expenses are expenses that do not require cash outlay. Implicit costs do not require cash outlay. An example of an implicit expense would be someone who uses a plot for business purposes but doesn’t pay for it. The owner also allocates time to maintain the plot, which is an indirect expense. While the owner pays for the plot out of pocket, he or she doesn’t receive a salary.
What is Explicit Cost?
Explicit costs are the payments you make to other people in your business, such as rent, wages, and materials. Indirect costs are not direct payments. They are hidden costs that you can’t see. For example, the payment you make to a supplier is a non-explicit cost, but it is still a cost to your business.
Explicit costs are expenses that a business actually pays for. These are usually the costs that can be measured and tracked in monetary terms. These include salaries, wages, rents, mortgages, and inventory. Controlling explicit costs can lead to higher profits and better long-term strategic plans. These expenses directly relate to the business’s operations.
Explicit costs are the ones a firm pays out in cash to achieve its objectives. These costs include rent and salary & wages as well as general expenses. They are important in determining the profitability of a business. It is important to understand all costs when you run a business. They can have a significant impact on the overall profitability of your company.
Explicit costs are the costs of physical goods and services that can be seen, held, or manipulated in the physical world. These are the items companies can expect to purchase. These include the labor and time required to create a product or service.
Main Differences Between Implicit Cost and Explicit Cost
- Implicit cost is the opportunity cost. An explicit cost is an out-of-pocket cost.
- Implicit costs cannot be determined easily, it is hard to track. Explicit costs are easily determined.
- Implicit costs are not recorded in the balance sheet. While the explicit costs are.
- Only economic profit can be calculated via the implicit costs. On the other hand, explicit costs help calculate both economic and accounting profits.
- Implicit costs do not require an outflow of cash while explicit costs do.
Conclusion
An implicit cost is the cost of a missed opportunity for a company. This type of cost is also known as an opportunity cost or economic cost. This is when a company doesn’t invest retained earnings in a new venture. These costs are not recognized in an accounting system so they must be accounted for in the business’s financial system. There are many ways to distinguish these two types of cost.
An explicit cost can be measured by cash payments to other companies. This type of cost is immediate and is the only expense a business shows. Accounting profits are determined using explicit costs. Indirect costs, on the other hand, are estimated expenditures that occur in the business without a cash exchange. Because they are difficult to quantify, they are not recorded in company books. This means that it is impossible to accurately calculate them. Hence one must understand the difference between explicit cost and implicit cost to converse well.
References
- https://www.jstor.org/stable/3664969
- https://pubsonline.informs.org/doi/abs/10.1287/mnsc.36.9.1133
- https://books.google.com/books?hl=en&lr=&id=5jrZ1Xm1B4UC&oi=fnd&pg=PR15&dq=explicit+cost&ots=INwgpdm4r6&sig=arbeawvMnumKU4hl8PS7d20xERE