Difference Between Explicit Cost and Implicit Cost

The main difference between explicit and implicit costs is that explicit costs refer to actual payments made to third parties for their services. Implicit cost, on the other hand, refers to the cost of self-supplied production factors.

In this article, we will discuss the difference between explicit cost and implicit cost in great detail. But, before we begin to do that, let’s quickly go through the list of topics listed under the table of content (TOC) that we will cover in this article.

Table of contents (TOC)

• Difference between explicit cost and implicit cost
• What is the explicit cost?
• What is the implicit cost?
• Key differences between explicit cost and implicit cost
• Conclusion

Difference between explicit cost and implicit cost 

For better understanding, let’s explore the difference between explicit cost and implicit cost in a tabular format:

What is the explicit cost? 

Explicit cost definition: Explicit costs are the costs that involve an immediate outlay of cash from an organization (out-of-pocket costs for an organization).

This type of cost includes all charges paid to complete the production, such as the cost of land, labor, electricity, stationery, postage, etc. Basically, the explicit cost involves all the costs paid to outsiders while the business is carried on. Explicit cost is permanently recorded and reported, and it is very easy to do so, as these expenses are recorded when they arise.

The recording of explicit costs is critical because it aids in the calculation of profit and serves other purposes such as decision-making, cost control, reporting, and so on. Let’s go through an example to understand the term “explicit cost” in a better way.

Explicit cost example:

Ankit owns a business, and the table below shows the expenses that Ankit has to pay:

Hence, the explicit cost here will be = Goods + Office rent + Employee salary + Supplies + Insurance + Electricity bill

i.e., 5000 + 1000 + 2000 + 500 + 800 + 2800 = 11,300

Hence, the entire explicit costs amount to ₹11,300. (Note: Add all of your expenses together to get your total explicit cost.)

What is the implicit cost? 

Implicit cost definition: Implicit costs are the cost of the opportunity that a company cannot use because it is not visible to the outside world.

In layman’s terms, implicit costs are the cost of resources already owned by the firm that could have been put to some other use. For example, an owner of an organization could use his/her labor to earn income at a job. Implicit costs need not entail any cash outflow from the business.

Implicit costs are not recorded in the books of accounts, nor are they reported. The purpose of determining the implicit cost is to aid in decision-making regarding the replacement of any asset, among other things. Implicit costs are those expenses incurred on self-supplied factors for which no payment in cash or on credit is made. Let’s go through an example to understand the term “implicit cost” in a better way.

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Implicit cost example:

Ankit owns a business that he has newly started. Basically, it is a startup. Hence, to help with the expenses, Ankit has decided not to take his salary of ₹ 40,0000 annually for two years.

Hence, the implicit cost here will be 400000 * 2 = ₹800000.

If Ankit has taken his salary, this amount has been added to explicit costs.

Key differences between explicit cost and implicit cost 

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.

Conclusion

The main difference between explicit and implicit costs is that explicit costs refer to actual payments made to third parties in exchange for their services. The cost of self-supplied production factors, on the other hand, is referred to as implicit cost.