distinguish between Explicit cost and Implicit cost and given example
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Basis of Difference
Explicit cost refers to the expenditures incurred or payments made by a firm to various factors of production and also non-factors of production.
Implicit cost refers to the opportunity cost of using the firm’s own resources.
Record in books of account
These costs are recorded in the books of account
These costs are not recorded in the books of account
These costs are also called as ‘out of the pocket expenses’
These costs are also called ‘economic cost’
Cash outlay from business
In case of explicit cost there is an cash outlay from the business
In case of implicit cost there is no cash outlay from the business.
Such cost deals with the expenditure incurred on the tangible items
Such cost deals with the expenditure incurred on the intangible items.
For example, payments in the form of wages for labour, rent for building.
For example, imputed value of the services of the owner of the firm, imputed rent of the owner occupied building.
explicit costs are those costs incurred by the producer and money flows from the producer to factor inputs Eg : salary paid to workers , rent paid for the building
implicit costs are also known as imputed cost those costs which the firm is liable to pay to the producer himself is known as implicit costs Eg : rent on producer's own building
business expense that is easily identified and accounted for. Explicit costs represent clear, obvious cash outflows from a business that reduce its bottom-line profitability. This contrasts with less-tangible expenses such as goodwill amortization, which are not as clear cut regarding their effects on a business's bottom-line value.
Good examples of explicit costs would be items such as wage expense, rent or lease costs, and the cost of materials that go into the production of goods. With these expenses, it is easy to see the source of the cash outflow and the business activities to which the expense is attributed.
A cost that is represented by lost opportunity in the use of a company's own resources, excluding cash. The implicit cost for a firm can be thought of as the opportunity cost related to undertaking a certain project or decision, such as the loss of interest income on funds, or depreciation of machinery used for a capital project.
Explicit costs are the cost, which are paid to outside factors of production while
- Implicit and explicit costs are two types of costs that do two things: help determine the expenditures of a potential action or business activity, and to determine the actual profits of a company.
- Implicit costs come in many forms. They include direct costs and accounting costs. Meanwhile, explicit costs also have alternative labels like: economic costs, notational costs, and implied costs.
- The nature of both costs is very different. Explicit costs are often recorded and they reflect a business payment for a transaction. On the other hand, implicit costs are not often recorded and they do not occur directly. This type of cost reflects a potential opportunity, benefits, or advantages that might have occurred in a given situation. In addition, explicit costs can be emergency costs in an unforeseen situation.
- Implicit costs directly affect a company’s profit and performance. In contrast, explicit costs can determine the total costs of the business as well as the business’s economic profits.
- Accountants often use implicit costs while economists use both types.