1. By Brenna Joy G. Salomon Explicit & Implicit Costs
2. Explicit Cost a direct payment made to others in the course
of running a business, such as wage, rent and materials A business
expense that is easily identified and accounted for. Explicit costs
represent clear, obvious cash outflows from a business that reduce
its bottom- line profitability. Good examples of explicit costs
would be items such as wage expense, rent or lease costs, and the
cost of materials that go into the production of goods. With these
expenses, it is easy to see the source of the cash outflow and the
business
3. Explicit Cost Explicit costs in business include all the
transactions pertaining to factors of production utilized by a
given company. Paying explicit costs always requires a business to
expend cash. If the company doesn't expend cash on given factors of
production, those factors are not explicit costs for business
transaction purposes. Explicit costs can also be variable or fixed,
depending on how these costs change as the company increases
output. Fixed costs don't change as the company increases
production, whereas variable costs can fluctuate as company output
increases.
4. Explicit Costs Examples A company's explicit costs can
include employee wages, payments made to purchase raw materials,
business rent/mortgage payments and fees related to purchasing
manufacturing equipment. Of these explicit costs, a business
considers rent/mortgage payments and the cost of purchasing
manufacturing equipment as fixed costs. Variable explicit costs
include employee wages because the cost of paying workers increases
as the business ramps up production. Equipment maintenance costs
and utility payments for retail store locations can also increase
as a business raises production levels.
5. Implicit Cost imputed cost, implied cost, or notional cost
the opportunity cost equal to what a firm must give up in order to
use factor of production which it already owns and thus does not
pay rent for. any cost that results from using an asset instead of
renting it out or selling it. Implicit costs can also be thought of
as intangible costs that are not easily accounted for. For example,
the time and effort that an owner puts into the maintenance of the
company, rather than working on expansion, can be viewed as an
implicit cost of running the business.
6. Implicit Costs Implicit costs represent opportunity costs
that use a company's internal resources without any explicit
compensation for utilizing those resources. Implicit costs are
opportunity costs because the business forgoes any chance of
earning money for allowing consumers or other companies the chance
to purchase those internal resources. A business doesn't record
implicit costs or transactions for accounting purposes because no
money is changing hands. Implicit costs or transactions only
represent the loss of potential income and not the actual loss of
profits. A business can still elect to include implicit costs as
costs of doing business, because these costs represent potential
sources of income.
7. Implicit Costs Examples A business owner who chooses to work
for her company without drawing a salary is forgoing the
opportunity to earn a fair wage for her business skills and
talents. The business owner's salary is an implicit cost. In the
case of a small business, an owner forgoing a salary in the early
days of the company is common. This decreases the cost burden on
the company and provides a greater chance to maximize revenue
during the company's inception when every dollar is crucial to
sustaining success.
