What Is an Implicit Cost?

An implicit cost is a c🦩ost that involves no exchange ofꦯ money and is not necessarily shown or reported as a separate expense.

It represents an 澳洲幸运5开奖号码历史查询:opportunity cost that arises when a company itself൲ uses assets it owns for some purpose. There's no explicit compensation for the utilization of those assets. So, there's no exchange of cash or added revenue.

This means the company forgoes the chance to earn money from the use of its resources by𝓰 others.

Put simply, an implicit cost involves using an asset rather than renting or selling it.

Understanding Implicit Costs

Implicit costs are also referred to as imputed, implied, or notional costs. These costs aren't easy to quantify. And businesses don’t necessarily record them for accounting purposes as money does not change hands.

These costs represent a loss of potential income, but not of profits. Implicit costs are a type of opportunity cost, which is thꦐe benefit that a company passes up by choosing one option versus another.

An implicit cost could be the revenue that a company misses out on because 𝓰it chooses to use an internal resource rather than get paid by a t♛hird party for its use of it.

For example, a comp🌳any could earn income by renting out its building. However, it instead decides to use the building to 💟manufacture and sell its products.

A company may choose to include implicit costs in its cost of doing business since♚ they represent possible sources of income.

Economists include both implicit costs and aওctual, regular costs of doing business (explicit costs) when calculating total economic profit.

In other words, 澳洲幸运5开奖号码历史查询:economic profit is the revenue a company generate𓃲s minus business expenses and any opportunity costs.

Implicit Costs vs. Explicit Costs

Implicit costs a🌞re techniℱcally not incurred and cannot be measured accurately for accounting purposes.

There is no cash outflow with implicit costs. But they are an important consideration because knowing them can help managers make effecti🦩ve decisions for the company.

These costs are in contrast to explicit costs, the other broad categorization o𒈔f business expenses. Explicit costs represent actual payments of cash made by a company for the company's o🅺perations.

Rent, salary, and other operating expenses are explicit costs. They are all recorded and appear on a company's financial statements.

The main difference between the two types of costs is that implicit costs are opportunity costs, while explicit costs are expenses paid with a company's own tangible assets (e.g. cash).

This makes implicit costs synonymous with imputed costs, while ex꧅plicit costs are considered out-of-pocket expenses.

Implicit costs and explicit costs are used when calculating economic profit, while only explicit costs are used when calculating 澳洲幸运5开奖号码历史查询:accounting profit.

Examples of Implicit Costs

Examples of implicit costs include the loss of interest income on funds and the depreciation of machinery for a 澳洲幸运5开奖号码历史查询:capital project.

They may also be intangible costs that are not easily accounted for, including when an own♍er allocates unpaid time for the maintenance of a company, rather than using those hours elsewhere.

When a company hires a new employee, there are implicit costs involved in training that employee. If a manager allocates eight hours of an existing employee's day to teach this new team member, the implicit costs would be the existing employee's hourly wage, multiplied by eight.

This is because the existing employe✱e would normally have been working in their regular role, and contributing to revenue earned♍.

Another example of an implicit cost involves 澳洲幸运5开奖号码历史查询:small business owners who may decide to pass on taking a salary in the early stages of a company's existence to reduce costs and increase rev✨enue🐎.

They provide t♍he business with their skill in lieu of a salary, which becomes a🍰n implicit cost.

The Bottom Line

ꩲImplicit costs are opportunity costs and are not usually recorded for accounting purposes. Though implicit costs represent a loss of income, they do not necessarily represent a loss of profit, because their value is being utilized elsewhere for the benefit of the business.

Though they are harder to quantify and are often subjective, implicit costs can play a key role in the success of🍒 a b𒆙usiness.