Difference Between Implicit and Explicit Costs

Implicit costs are technically not incurred and therefore cannot be measured accurately
for accounting purposes. There are no cash exchanges in the realization of implicit costs.
However, they are important costs to ascertain because they help managers make
effective decisions on behalf of the company.

This is in stark contrast to explicit costs, the other broad categorization of business
expenses. These costs represent any costs involved in the payment of cash or other
tangible resource by a company. Rent, salary and other operating expenses are
considered explicit costs and are recorded within a company's financial statements.

The main difference between the two types of costs is that implicit costs are opportunity
costs, while explicit costs are expenses paid with a company's own tangible assets. This
makes implicit costs synonymous with imputed costs, while explicit costs are considered
out-of-pocket costs. Implicit costs are harder to measure than explicit costs, which makes
implicit costs more subjective than explicit ones. Implicit costs help managers calculate
overall economic profit, while explicit costs are used to calculate accounting profit and
economic profit.