The economic students often get confused while differentiating it between the explicit cost and implicit cost. Before knowing both these terms in details, one needs to know the meaning of implicit and explicit in the English language as it will make things easy to distinguish between both the terms. Explicit refers to something clear, without any doubt or clear cut, on the other hand, implicitly refers to the indirect or something suggested but not directly taking place. Both the terms implicit and explicit costs stand for the business transaction or activity. The thing which makes them different is that implicit cost is directly bearded by the firm or the company or organization during the production. Whereas, the implicit cost is directly opposite to it, the organization or firm do not incur these costs. Most primarily, implicit cost measures the opportunity cost, which means the cost or profit foregone due to opting the alternatives.
What is Explicit Cost?
An explicit cost is a cost that is directly incurred by the firm, company or organization during the production period. In this type of cost, the outflow of cash takes place to utilize the factors of production. The record of the explicit cost is noted by the accountant of the company, and can easily be traced as each and every of the expenditure is carefully noted, and is kept as a record. The transfer or outlay of cash takes place through cheques or hand-to-hand, and that too is kept in record. The explicit cost includes rent, salary, wages, stationary, and other expenses which are paid by the company during the process of production. For example, when labors and employees are given salary the outlay of cash takes place, and as a replacement of this salary and wages, the employees offer their work and efforts. In the case of knowing the profit of the company, this amount is directly involved. Other than that, the explicit cost also tells the entrepreneur or the owner of the business to take decisions to make sure the more profits, cost-controls and other functions. The explicit cost is also known as the out-of-pocket costs. In other words we can say that this type of cost is the clear photo of the performance of the firm or the company as it directly tells about the profit or loss.
What is Implicit Cost?
Implicit cost is the cost that is not directly incurred by the firm or the company. In this type of cost, an outlay of cash doesn’t take place so that is why it isn’t noted, and subsequently it can’t be traced. In other words it is said that the implied cost is the direct opposite of the explicit cost. It mainly revolves around the concept of opportunity cost, which tells about the (indirect) cash or profit foregone due to opting the alternative. The loss or the profit in the implicit cost doesn’t directly have any impact on the performance of the company, although it has direct interference with the profit of the company. In this the transfer or loss of cash doesn’t directly take place. The interest on owner’s capital, or the salary to the owner are the prominent examples of the implied cost. The implied cost is not kept as a record, so it can’t be traced. The implicit cost is also known as imputed costs.
Explicit Cost vs. Implicit Cost
- An explicit cost is a cost that is directly incurred by the firm, company or organization during the production period. On the other hand, the implicit cost is directly opposite to it, as it is the cost that is not directly incurred by the firm or the company.
- In explicit cost outflow of cash takes place, whereas in implicit cost outflow of cash doesn’t take place.
- The explicit cost is kept on record by the accountant of the firm, while implicit cost is not on the record and is hard to be traced back.
- Salaries, wages and rent are few of the examples of the explicit cost, whereas the interest on owner’s capital, or the salary to the owner are the prominent examples of the implicit cost.
- The explicit cost is also known as the out-of-pocket costs, whereas the implicit cost is also known as imputed costs.
- The explicit cost is handy in calculating both the accounting and economic profit. Contrary to this, through implicit cost, only the economic profit is calculated.