10 DIFFERENCE BETWEEN IMPLICIT COST AND EXPLICIT COST

An explicit cost can be defined as a cost which directly reduces the net income of a company.

In other words, an explicit cost is a direct payment made to third parties while running the business.

Explicit expenses include the price of supplies, labour costs, the cost of purchasing land, the cost of promotion, etc.

One common feature of explicit costs is that they appear in the income statement, where they are shown as a decrease in the net income of a company.

Explicit costs are sometimes called accounting costs, or monetary costs.

On the other hand, an implicit cost is the opportunity cost of using the factors of production to produce goods and services without receiving any explicit payment in return 

Stated differently, an implicit cost is the price of the revenue that a company would have made if it had used its resources to produce another good instead of the one it is currently producing.

Implicit costs do not show up on the income statement and have no impact on a company's net income.

Implicit costs may also be referred to as notional costs, implied costs, or imputed costs.

Difference Between Implicit Cost And Explicit Cost

1. Implicit cost is the opportunity cost of using a factor of production that a company already owns, whereas explicit cost is the payment for the actual factor of production used by a firm.

2. Explicit costs are real costs, whereas implicit costs are merely implied.

3. Explicit costs are recorded in the books of account whereas implicit costs are not recorded in the books of account.

4. Explicit cost is used in the calculation of both economic profit and accounting profit. Remember that accounting profit is revenue minus explicit cost.

Implicit cost is used in the calculation of economic profit. It is not used to calculate accounting profit.

Remember that economic profit is accounting profit minus implicit cost.

5. In contrast to implicit cost, which does not involve any cash outflow, explicit cost involves a real cash outflow.

6. Both accountants and economists use explicit costs, but only economists use implicit costs.

7. Salary payments to employees, advertising expenses, stationery expenses, etc. are a few examples of explicit costs.

Contrarily, instances of implicit costs include the interest that the owner's money would have made if it had been invested somewhere else and the wage the owner would have been making if he had been employed somewhere else.

8. Since explicit costs are borne and paid for directly by the business, they can be measured objectively.

In contrast, implicit costs are measured subjectively because they are not exactly Incurred and paid by the business

9. While implicit cost is also known as notional cost, imputed cost, and implied cost, the explicit cost is also known as accounting cost or monetary cost.

10. Implicit costs are only included in economic costs but explicit costs are included in both accounting and economic costs.

READ ALSO: MARGINAL, FIXED COSTS, VARIABLE COSTS, AVERAGE FIXED COSTS AND OTHER COSTS YOU NEED TO KNOW

Tabular Comparisons of Explicit cost and Implicit Cost

Features    Explicit cost  Implicit cost
Effect on net incomeReduces net incomeNo effect on net income
Used by AccountantYesNo
Used by economist

YesYes
Includes opportunity cost?NoYes
Recorded in the income statement?YesNo
Also called Monetary costImplied cost
Involves outflow of cash?YesNo
MeasuredObjectivelySubjectively
Included in economic cost?YesYes
Included in accounting cost?YesNo
Used forDetermining accounting and economic profitEconomic profit

To better understand the difference between explicit cost and implicit cost, let's take an example of a sole proprietorship business.

The explicit cost for the business will include, among other things, the cost of renting a shop, the cost of buying goods from the shop, cost of hiring sales attendants.

The implicit cost of the business will be the salary the owner would earn if he was working elsewhere. 

For example, if the owner could earn €30,000 working as a teacher, then the implicit cost is the €30,000 the owner implicitly foregone to run the sole proprietorship business.

You are invited to follow us on Twitter and Telegram.

Help us grow our readership by sharing this post

Related Posts

Post a Comment

Subscribe Our Newsletter