Explicit Cost

Explicit costs are typical business costs which appear in the general ledger and have a direct impact
on the profitability of a company. Explicit costs are out-of-pocket costs for a firm.
Examples of explicit costs include salaries, raw materials, utilities, lease payments, and other direct
costs.

Explicit costs—also known as accounting costs—are easy to identify and link to a company's
business activities to which the expenses are attributed. They are recorded in a company's
general ledger and flow through to the expenses listed on the income statement. The net
income (NI) of a business reflects the residual income that remains after all explicit costs have
been paid. Explicit costs are the only accounting costs that are necessary to calculate a profit,
as they have a clear impact on a company's bottom line. The explicit-cost metric is especially
helpful for companies' long-term strategic planning.

There are several reasons why the explicit cost is important, including:

 Used to calculate profit: The net income is reflected in the income that remains after all
explicit costs have been paid. It is the only cost that you need to calculate profit, so it is clearly
indicated.

 Allows for long-term strategic planning: Because explicit cost is used to calculate a
company's profitability, it is a key metric for long-term strategic planning within an organization.

Implicit Cost
An implicit cost is any cost already incurred but not explicitly expressed or reported as a separate
expense. It reflects the value of opportunity that occurs when an organization uses internal capital for
a project without any precise reimbursement for resource use.

This means that when a company allocates its resources, the ability to earn money from resource and
use elsewhere is always forgotten, so there is no cash exchange. Simply put, an implicit cost stems
from the use of an asset, rather than renting or purchasing it.

Implicit costs are also called values imputed, implied, or notional. It's not easy to quantify those costs.
That's because for accounting purposes companies don't typically report indirect expenses because
money doesn't change hands.

These costs are a loss of potential revenue but not of profits. A company may choose to include
these costs as the cost of doing business as they represent potential revenue sources. Definitions of
tacit expenses include loss of interest income on funds and equipment depreciation for a construction
project.
  explicit cost and implicit cost comparison or diiference

How is explicit cost different from implicit cost?

Explicit costs refer to actual payments, such as wages and rent. Implicit costs represent the
opportunity costs that occur from allocating resources for a specific purpose that can't be assigned a
monetary value. They are not clearly identified, defined or reported and often deal with intangibles.
The time required to train a new employee is an implicit cost, as is time spent on business activities
that could be better spent in other ways. Opportunity costs are often implicit costs, with the cost being
the act of giving up the next best alternative.

For example, if an appliance company was considering investing in a new line of refrigerators to sell
but instead chose to invest the same amount of money into an employee training program, the cost
for the missed opportunity to sell and make money off of the refrigerators is an implicit cost.

Costs will oftentimes have both explicit and implicit portions. For example, if the printer at the printing
company breaks down, the cost of the repair technician and any parts that are needed are explicit
costs, while the lost production time as a result of the break down is an implicit cost.

The total sum of the explicit and implicit costs represents the total economic cost.

When evaluating a business' operations, management will utilize explicit costs to determine the
business' profitability. However, management may rely on implicit costs for decision-making or when
choosing between different options. Management will use both explicit and implicit costs to evaluate
the total return that a company receives on all costs that are related to revenue.

The biggest difference between implicit and explicit cost lies in the difference in profit concepts.
Explicit costs are typically subtracted from a company's total revenue to calculate the company's
accounting profit. Accounting profit refers to the difference between money brought in and money
paid out, usually in the form of expenses such as wages, rent or other overhead costs. Additionally,
the accounting profit does not take implicit cost into account, and the accounting profit can be a
simplistic view of a company's profitability rather than its overall economic success in the market
industry.

Moreover, a company's economic profit can be calculated by subtracting total cost, both implicit and
explicit, from the total revenue. Taking into account the economic profitability may allow a business to
see its true profitability.

Although the accounting profit of a business may be used to determine the total income taxes it pays,
the economic profit is what ultimately can determine a business's economic success.