Implicit Cost vs Explicit Cost
Implicit and explicit costs are two types of costs that occur in a company. Both implicit and explicit costs come after a business transaction or activity. They can occur in any business activity like marketing distribution, production, or recruitment.
Explicit costs are costs that occur and are reported in business documents. They are also known as direct costs or accounting costs. An explicit cost is a cost that happens for a purpose. In addition, explicit costs usually have a direct impact on the company and its and profits. Explicit costs result in tangible assets or opportunities for the company. Examples of explicit costs are: payments for rent, salary and wages, services from other companies, raw materials, maintenance, bills, and other expenditures.
Explicit costs are easier to identify, recognize, and account for because they leave a record or paper trail. In addition, explicit costs usually involve physical objects and money-based transactions.
Explicit costs are used by accountants in preparing business analyses and business-related documents like accounting management and financial reports. For accountants, the explicit costs determine the company’s profit loss or gain. Explicit costs are used to provide a clear concept or picture of a company’s profit and performance. Aside from being used in reviewing profits and performance, explicit costs are also useful in financial planning or forecasting trends.
On the other hand, implicit costs are the direct opposite of explicit costs. Implicit costs are also called implied costs, economical costs, or notational costs. Implicit costs are not really shown or reported as costs.
Implicit costs are usually described as opportunity costs or the loss of an opportunity in a given time or situation. Implicit costs deal with intangibles that usually leave without a trace or record. Implicit costs include: wasted potential opportunities, time, profit, and labor. Implicit costs waive the potential benefits and satisfaction in a certain business transaction. Simply put, an implicit cost is the loss of a possible benefit or asset that did not occur.
Implicit costs can also be said to be the indirect results of business activities and processes. Usually, they involve indirect expenses from unforeseen events or emergencies. Since implicit costs leave no records, these costs are not easy to account for.
Economists use explicit costs to determine the economic profits of a business. Using implicit costs, economists can also determine the total costs of running a particular business. This is done by adding the implicit costs and explicit costs.
Summary:
- Implicit and explicit costs are two types of costs that do two things: help determine the expenditures of a potential action or business activity, and to determine the actual profits of a company.
- Implicit costs come in many forms. They include direct costs and accounting costs. Meanwhile, explicit costs also have alternative labels like: economic costs, notational costs, and implied costs.
- The nature of both costs is very different. Explicit costs are often recorded and they reflect a business payment for a transaction. On the other hand, implicit costs are not often recorded and they do not occur directly. This type of cost reflects a potential opportunity, benefits, or advantages that might have occurred in a given situation. In addition, explicit costs can be emergency costs in an unforeseen situation.
- Implicit costs directly affect a company’s profit and performance. In contrast, explicit costs can determine the total costs of the business as well as the business’s economic profits.
- Accountants often use implicit costs while economists use both types.