EXPLICIT COST AND IMPLICIT COST

DIFFERENCE BETWEEN EXPLICIT COST AND IMPLICIT COST

Definition of Explicit Cost

It refers to the expenditure incurred by the producer to buy the inputs from the market. For example, the purchase of raw materials, labor from the market, etc.

It can be measured as the cash payments that a firm makes to others for the purchase of inputs in the market. These are also known as Out Pocket costs. The explicit costs can be determined easily in the market and require cash physical outflow of cash. Therefore, these are the costs that are considered while calculating accounting profit as well as economic profit.

Recording of the explicit cost is very important because it helps in the calculation of profit as well as it fulfils purposes like decision-making, cost control, reporting, etc.

Definition of Implicit Cost

It refers to the cost of using self-owned inputs. Therefore, the implicit cost refers to the estimated expenditure on the use of self-owned inputs. For example, estimated rent on the owner’s building and estimated wages to family labor, etc.

It is measured as imputed or estimated costs of self-owned and self-employed resources. Hence, implicit costs can be referred to as opportunity costs or imputed costs. The measurement or calculation of implicit costs is difficult as the producer doesn’t have to pay it in reality. Thus, these costs are considered only while calculating economic profit.

Some of the key differences between explicit cost and implicit cost are:

In explicit cost, payment is made, but in implicit cost, no payment is made.
Explicit cost is recorded and reported, whereas implicit cost is neither recorded nor reported.
Explicit cost is also known as Out-of-pocket cost, and the implicit cost is known as imputed cost.
Explicit cost aids in the calculation of accounting profit as well as economic profit. In contrast, Implicit cost only aids in the calculation of economic profit.
Explicit cost includes costs involving a cash outflow due to the use of production factors. Implicit cost, on the other hand, includes costs for which there is no monetary outlay.