What is the Difference Between Implicit Cost and Explicit Cost?
🆚 Go to Comparative Table 🆚The main difference between implicit and explicit costs lies in the nature of the costs and how they are accounted for in a business.
Explicit Costs:
- These are out-of-pocket costs for a firm, involving actual cash payments.
- Examples include wages and salaries, rent, lease payments, utilities, raw materials, advertising, supplies, and other direct costs.
- Explicit costs are easy to identify, track, and record, making them straightforward to account for in financial calculations.
Implicit Costs:
- These are opportunity costs, representing the value of resources already owned by the firm and used in the business.
- They do not involve cash outlays and are instead associated with the use of the firm's own assets or the contribution of resources by the owner.
- Examples include the interest that could have been earned on the owner's capital, the salary the owner could have earned working elsewhere, or the rent that could have been charged for using a building owned by the firm.
- Implicit costs are more challenging to measure and quantify, making them more subjective in nature.
In summary, explicit costs are actual cash payments made by a business, while implicit costs represent the opportunity costs associated with using the firm's own resources or the owner's contributions. Both types of costs are important for understanding the true profitability of a business, as they help calculate accounting profit (total revenues minus explicit costs) and economic profit (total revenues minus total costs, including implicit costs).
Comparative Table: Implicit Cost vs Explicit Cost
The main difference between implicit and explicit costs lies in the nature of the costs and how they are accounted for in a business. Here is a comparison table highlighting the differences between the two:
| Feature | Implicit Costs | Explicit Costs |
|---|---|---|
| Definition | Implicit costs are opportunity costs that arise from using resources for a certain purpose instead of their best alternative. | Explicit costs are tangible expenses incurred during business operations. |
| Measurability | Not quantifiable. | Quantifiable and measurable. |
| Cash Outflow | No cash outflow. | Involves out-of-pocket payments. |
| Examples | - A business owner's forgone salary. - Opportunity cost of using business owner's capital. |
- Wages and salaries. - Rent. - Materials. |
Implicit costs represent the benefits that a company misses out on by choosing one option or alternative over another, while explicit costs are actual expenses paid by a company. Implicit costs are often unrecorded for accounting purposes, as they do not involve a cash payment. On the other hand, explicit costs are recorded when they are incurred and are important for calculating profit and cost control.
- Implicit vs Explicit
- Tacit vs Explicit Knowledge
- Price vs Cost
- Explicit Cursor vs Implicit Cursor
- Direct vs Indirect Costs
- Average Cost vs Marginal Cost
- Cost vs Expense
- Fixed Cost vs Sunk Cost
- Variable vs Fixed Costs
- Actual Cost vs Standard Cost
- Job Costing vs Contract Costing
- Opportunity Cost vs Marginal Cost
- Unit Price vs Unit Cost
- Tangible vs Intangible Cost
- Sunk Cost vs Opportunity Cost
- Costing vs Budgeting
- Costing vs Cost Accounting
- Idle Cost vs Standard Cost
- Marginal Costing vs Differential Costing