Business

Difference between explicit cost and implicit cost

Main difference

Economics students often get confused in differentiating between explicit cost and implicit cost. Before knowing these two terms in detail, it is necessary to know the meaning of implicit and explicit in the English language, since it will facilitate the distinction between both terms. Explicit refers to something clear, unmistakable, or well-defined, on the other hand, implicitly refers to something indirect or suggested but not directly occurring. Both the terms implicit and explicit costs represent the business transaction or activity. What makes them different is that the implicit cost is borne directly by the company or the company or organization during production. While the implicit cost is directly opposite to it, the organization or company does not incur costs. More mainly,

Comparison chart

explicit cost implicit cost
Definition An explicit cost is a cost that is directly incurred by the business, company or organization during production. Implicit cost is directly opposite to it, as it is the cost that is not directly incurred by the business or company.
cash out In the explicit cost the cash outflow takes place. In the implicit cost, the cash outflow does not take place.
Engrave The company’s accountant records the explicit cost. The implicit cost is not recorded and is difficult to trace.
Example Salaries, wages, and rent are some of the examples of explicit cost. Interest on owner’s equity or owner’s salary are the prominent examples of implicit cost.
Also know as The explicit cost is also known as out-of-pocket costs. Implicit cost is also known as imputed costs.
profit calculation Explicit cost is useful for calculating both economic and accounting profit. Through the implicit cost, only the economic benefit is calculated.

What is the explicit cost?

An explicit cost is a cost that is directly incurred by the business, company or organization during the production period. In this type of cost, the cash outflow occurs to use the factors of production. The company accountant writes down the explicit cost record, and it can be easily traced as each and every expense is carefully noted down and kept as a record. The transfer or disbursement of cash is done by check or hand to hand, and that is also recorded. The explicit cost includes rent, wages, salaries, stationery and other expenses paid by the company during the production process. For example, when workers and employees are given a salary, cash disbursement occurs, and as a replacement for this salary and wages, employees offer their work and effort. In the case of knowing the profit of the company, this amount is directly involved. Aside from that, explicit cost also tells the entrepreneur or business owner to make decisions to ensure more profit, cost controls, and other features. The explicit cost is also known as out-of-pocket costs. In other words, we can say that this type of cost is the clear picture of the performance of the company or the company, since it speaks directly of the profit or loss. cost controls and other functions. The explicit cost is also known as out-of-pocket costs. In other words, we can say that this type of cost is the clear picture of the performance of the company or the company, since it speaks directly of the profit or loss. cost controls and other functions. The explicit cost is also known as out-of-pocket costs. In other words, we can say that this type of cost is the clear picture of the performance of the company or the company, since it speaks directly of the profit or loss.

What is the implicit cost?

Implicit cost is the cost that is not directly incurred by the business or company. In this type of cost, there is no cash disbursement, so it is not recorded, and subsequently cannot be traced. In other words, the implicit cost is said to be the direct opposite of the explicit cost. It mainly revolves around the concept of opportunity cost, which refers to the (indirect) cash or benefit that is lost by choosing the alternative. The loss or gain in the implicit cost has no direct impact on the performance of the company, although it has a direct interference with the profit of the company. In this, the transfer or loss of cash does not occur directly. Interest on owner’s equity or owner’s salary are the prominent examples of implicit cost. The implicit cost is not kept as a record, so it cannot be traced. Implicit cost is also known as imputed costs.

Explicit Cost vs. Implicit Cost

  • An explicit cost is a cost that is directly incurred by the business, company or organization during the production period. On the other hand, the implicit cost is directly opposite to it, as it is the cost that is not directly incurred by the business or company.
  • In the explicit cost there is a cash outflow, while in the implicit cost there is no cash outflow.
  • The company’s accountant records the explicit cost, while the implicit cost is not recorded and is difficult to trace.
  • Wages, salaries, and rent are some of the examples of explicit cost, while interest on owner’s equity or owner’s salary are the prominent examples of implicit cost.
  • Explicit cost is also known as out-of-pocket costs while implicit cost is also known as imputed costs.
  • Explicit cost is useful for calculating both economic and accounting profit. Contrary to this, through the implicit cost, only the economic benefit is calculated.

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