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Meaning of Explicit Cost
Costs resulting in an immediate outflow of cash from the business are termed as explicit costs. These costs are incurred during the production process or the regular course of action of the business. Explicit costs are incurred due to the utilization of factors of production such as capital, land, labor etc.
Explicit costs are paid in the form of wages, rest, material, salary, electricity bills, and other overhead miscellaneous expenses. To know more about material, labor and expenses click here.
Explicit costs are easy to recognize and keep track off. They are recorded when they arise and are calculated in terms of cash. Keeping a record of explicit cost proves to be very important as it helps in purposes of calculation of profits, cost controlling, decision making, etc.
Meaning of Implicit Cost
Implicit cost is also known as economic cost and do not require an outflow of cash from the business. Implicit cost it the value of sacrifice made by the company at the time of conducting some other action. The cost arises when the asset is utilized as a factor of production instead of renting it out.
Implicit cost cannot be easily measured as they are not incurred in monetary terms. Only an estimate for these can be prepared. These costs are not reported or recorded in the books of accounts. Implicit cost is determined as they assist in the decision-making process regarding replacement of any asset. These costs impact the performance and profitability of the company. Examples of implicit costs are the salary of proprietor and interest on owner’s capital.
After gaining an insight on both, explicit and implicit costs, let’s have a look at the difference between them.
Explicit Cost Vs Implicit Cost
The following are the differences between explicit cost and implicit cost:
Explicit costs occur when the company pays for the usage of its factors of production. Implicit costs occur when the company uses resources belonging to the owner such as capital and inventory.
Alternatively known as
Explicit cost is also referred to as out-of-pocket costs. Whereas implicit cost is referred to as imputed or opportunity cost.
Explicit cost can be determined easily. However, implicit cost does not have track and cannot be determined precisely.
Estimation of Cost
Explicit cost is actually incurred thus the measurement for it is objective in nature. As opposed to implicit cost that occurs indirectly, thereby making the measurement subjective in nature.
Calculation of Profit
Explicit cost assists in calculating both, accounting profit as well as economic profit. Whereas, implicit costs help in calculating only economic profit.
Recording and Reporting
The management on a regular basis does recording and reporting of explicit costs. However, implicit costs are not recorded or reported to the management of the company.
Explicit cost requires an outflow of cash from the entity. While implicit costs do not require an outflow of cash.
Economists take into consideration both explicit and implicit costs. Whereas, accountants use only implicit costs.
Implicit and explicit costs relate to a firm’s opportunity, costs, and cash expenditures. A business may incur explicit costs from a variety of sources. As opposed to implicit costs which are difficult to quantify. However, the company endures both the cost and conducts decisions keeping both the costs in consideration.
To know more about the different types of costs, click here.