What Is an Implicit Cost?

An implicit cost is a cost that involves no exchange of money and is not necessarily shown or reported as a s𝄹eparate exp𒁃ense.

It represents an 澳洲幸运5官方开奖结果体彩网:opportunity cost that arises when a company itself uses assets it owns for some purpose. There's no explicit compensation for the utilization of those assets. So, there's no exchange of ꦕcash or added revenue.

This means the company forgoes the chance to earn money 𝓀from the use of its resources by 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 c🌜⛦ost, which is the benefit that a company passes up by choosing one option versus another.

An implic💧it cost could be the revenue that a company misses out on because it chooses to use an internal resource rather than get paid by a third party for its use of it.

For example, a 🦂company 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 choos♛e to include implicit costs in its cost of doing business since they represe𓆉nt possible sources of income.

Economists include both implicit costs and actual, regular costs of doing business (explicit costs) when calculating total economic profi💎t.

In other words, 澳洲幸运5官方开奖结果体彩网:economic profit is the revenue a company gener💙ates minus business expenses and any opp♏ortunity costs.

Implicit Costs vs. Explicit Costs

Implicit costs are ✱technically not incurred and cannot be measured accurately for accountin꧋g purposes.

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

These costs are in contrast to explicit costs, the other broad categorization of business expenses. Explicit costs represent actual payments of cas꧋h made by a company for the company's operations.

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 explicit costs are considered out-of-poc꧑ket expꦯenses.

Implicit costs and explicit costs are used when calculating economic profit, while only explicit costs are used when calculating 澳洲幸运5官方开奖结果体彩网: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官方开奖结果体彩网:capital project.

They may also be intangible costs that are not easily accounted for, including when an owner a🐽llocates unpaid time for the ma𒁃intenance 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 employee would normally have♓ been working in their regular role, and contribu☂ting to revenue earned.

Another example of an implicit cost involves 澳洲幸运5官方开奖结果体彩网:small business owners who may decide to pass on taking a salary in the early stages of a company's existe🦩nce to reduce costs and incre🌳ase revenue.

🍰They provide the business with🦂 their skill in lieu of a salary, which becomes an implicit cost.

The Bottom Line

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

Though they a👍re harder to quantify and are often subjective, impli𝓰cit costs can play a key role in the success of a business.