What is an example of an implicit cost?

Implicit costs are not easily identified and can be things such as depreciation on company equipment or loss of interest income on funds.

Is labor an implicit or explicit cost?

Labor is an explicit cost as it is tracked by the company and leaves a paper trail. It is defined as an out-of-pocket cost, meaning it's an explicit cost.

What is an explicit cost?

Explicit costs are costs that are tangible expenses such as employee wages, lease or mortgage payments, utilities, materials, marketing and advertising, and more.

Implicit Vs. Explicit Costs: What’s The Difference?

Business Terms

If you’re running a business, one of your primary goals will be to make a profit. In order to find out what your profit is, you must understand what implicit and explicit costs are and how they differ. You will deal with both types of costs while doing business and must use them to determine accounting and economic profit and opportunity cost, among other things.

Costs are typically associated with the price we pay for something. However, when you ask an economist, they’ll define it as the number of resources used to create a service or product. Something like completing a task or a missed opportunity can also be defined as a cost. Below we’ll discuss the difference between implicit and explicit costs;

Explicit Costs	Implicit Costs
Explicit costs are tangible expenses that are easy to identify, record, and audit.	Implicit costs don’t get reported as expenses and are not clearly defined or identified.
Helps to identify both accounting and economic profit.	Helps only in the calculation of economic profit.
Measured objectively because the cost is directly incurred.	Measured subjectively because the cost is incurred indirectly.

What Are Explicit Costs?

Explicit costs are typical business costs that appear in a company’s record-keeping system and directly affect the business’s profitability. These costs are clearly defined dollar amounts that flow into income statements for the business. These types of costs can be anything from wages, mortgage payments, lease payments, utilities, and raw materials.

These costs are sometimes referred to as accounting costs, meaning they are easy to identify and easily identifiable based on the expenses attributed to which business activity. Explicit costs are the only costs necessary to calculate a profit because they have a direct impact on the company’s bottom line.

Explicit costs can be thought of as costs involving only tangible assets and transactions, which result in real business costs and opportunities. They are much easier to identify and audit because they all leave a paper trail. Things like advertising, utilities, supplies, inventory, or equipment are examples of these types of costs.

Calculating explicit costs is much easier than calculating implicit costs. Add your business expenses together that are tracked in your record-keeping system to calculate your overall explicit cost. Because these costs will vary drastically from company to company, there is no specific formula to compute these costs.

What Are Implicit Costs?

Implicit costs are a bit more complicated than explicit costs. These costs have already occurred but may not be tracked or reported as separate expenses. These could be opportunity costs, such as when a company uses an asset they already have rather than renting or buying it.

Implicit costs are sometimes referred to as imputed, implied, or notional costs, meaning they are difficult to quantify. Most businesses do not take the action of recording implicit costs for accounting because the money doesn’t change hands. Implicit costs are opportunity costs that can be termed as missed opportunities for the company.

For example, if a company uses an internal resource over a third party, it may miss out on revenue from using the third party. Such as a company that owns a building that they use for internal manufacturing purposes rather than renting it out to others to accrue an earned revenue from a third party.

Because implicit costs are not technically incurred, they aren’t measured accurately and therefore are typically not reported correctly to accounting. Because there is no cash exchange, it can be difficult to realize implicit costs, but it is important to be aware of them when leaders are making important decisions for the company.

Implicit costs are opportunity costs synonymous with imputed costs. These are incredibly subjective costs but can help leadership teams calculate economic profit for the business. Some examples of implicit costs are depreciation of equipment, loss of interest income on funds, allocating company time towards maintenance projects instead of other tasks, etc.

Another popular implicit cost is training a new employee. The company utilizes internal resources to train its new employee, removing them from the time they might be working on something else. The best way to calculate this implicit cost would be to take the hours of training multiplied by the employee’s hourly wage.

Similar to explicit costs, because implicit costs vary so drastically, it can be difficult to calculate these costs with one specific formula. The best way to calculate this is to look at the costs associated with any individual opportunity, such as the training example given above.

Implicit vs. Explicit costs FAQ

What is an example of an implicit cost?

Implicit costs are not easily identified and can be things such as depreciation on company equipment or loss of interest income on funds.
Is labor an implicit or explicit cost?

Labor is an explicit cost as it is tracked by the company and leaves a paper trail. It is defined as an out-of-pocket cost, meaning it’s an explicit cost.
What is an explicit cost?

Explicit costs are costs that are tangible expenses such as employee wages, lease or mortgage payments, utilities, materials, marketing and advertising, and more.

Business Terms

Never miss an opportunity that’s right for you.

Author

Caitlin Mazur

Caitlin Mazur is a freelance writer at Zippia. Caitlin is passionate about helping Zippia’s readers land the jobs of their dreams by offering content that discusses job-seeking advice based on experience and extensive research. Caitlin holds a degree in English from Saint Joseph’s University in Philadelphia, PA.

Create Resume