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Explicit Cost vs. Implicit Cost: Know the Difference

Shumaila Saeed
By Shumaila Saeed || Updated on December 25, 2023
Explicit Cost involves direct, out-of-pocket payments, while Implicit Cost represents the opportunity costs of using resources owned by the business.
Explicit Cost vs. Implicit Cost

Key Differences

Explicit Cost refers to clear, direct expenses such as wages, rent, and materials. These costs are easily identified and recorded in financial statements. Implicit Cost, however, represents the opportunity cost of using resources the business owns, like using a building the business owns instead of renting it out.
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Dec 10, 2023
Explicit Costs are recorded in a business’s financial statements and are tangible expenses. Implicit Costs are not recorded in financial statements but are critical for internal decision-making and assessing true profitability.
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Dec 10, 2023
Examples of Explicit Costs include salaries paid to employees, utility bills, and raw materials. Implicit Costs include the foregone income from not investing capital elsewhere or the owner’s time when they could be earning money elsewhere.
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Shumaila Saeed
Dec 10, 2023
Explicit Costs directly affect a company’s profit and loss statement. Implicit Costs, while not directly recorded, affect the economic profit as they represent potential earnings not realized.
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In accounting, Explicit Costs are primarily considered. In economics, both Explicit and Implicit Costs are considered to evaluate the true economic profit of a business.
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Dec 10, 2023
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Comparison Chart

Nature

Direct, tangible expenses
Opportunity costs, not directly paid
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Recording

Recorded in financial statements
Not recorded in financial statements
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Examples

Salaries, rent, utilities
Foregone rent, alternative income
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Impact on Profit

Directly affects accounting profit
Affects economic profit calculation
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Relevance

Primarily in accounting
Important in economic analysis
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Explicit Cost and Implicit Cost Definitions

Explicit Cost

Represents out-of-pocket expenses for a business.
Purchasing raw materials is an Explicit Cost for the manufacturer.
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Implicit Cost

Affects economic profit but not accounting profit.
The Implicit Cost of an entrepreneur’s expertise affects the economic value of the business.
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Dec 03, 2023

Explicit Cost

Explicit Cost involves direct cash outflow.
The company’s rent payment is an Explicit Cost.
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Implicit Cost

Plays a role in internal decision-making.
The Implicit Cost of using existing equipment is the foregone benefit of upgrading to more efficient technology.
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Explicit Cost

These costs are recorded in accounting books.
Wages paid to employees are an Explicit Cost in the balance sheet.
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Implicit Cost

Reflects the cost of not pursuing the next best alternative.
Capital invested in the business has an Implicit Cost, being the foregone interest from not investing elsewhere.
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Explicit Cost

Explicit Costs are tangible and quantifiable.
The annual subscription for software is an Explicit Cost for the company.
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Implicit Cost

Implicit Cost represents the opportunity cost of using owned resources.
Using the owner's building for the business is an Implicit Cost, as it forgoes rental income.
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Dec 03, 2023

Explicit Cost

Directly affects a company’s profit and loss.
Advertising expenses are an Explicit Cost impacting the firm's profitability.
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Dec 03, 2023

Implicit Cost

Not directly recorded in financial statements.
The owner’s time spent running the business is an Implicit Cost.
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Repeatedly Asked Queries

Can Explicit Costs affect a business’s cash flow?

Yes, they directly impact cash flow.
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Dec 10, 2023

How are Explicit Costs recorded?

They are recorded in a company's financial statements.
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Are utility bills considered an Explicit Cost?

Yes, they are a typical example of Explicit Costs.
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Are Implicit Costs considered in accounting profit?

No, they are not included in accounting profit.
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Can Implicit Costs be quantified easily?

They are more challenging to quantify than Explicit Costs.
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What defines an Explicit Cost?

Direct financial payments made by a business.
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What is an example of an Implicit Cost?

Foregone rental income from using a business-owned property.
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Are salaries an Explicit or Implicit Cost?

Salaries are an Explicit Cost.
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Do Implicit Costs include foregone wages?

Yes, such as the income an owner could earn elsewhere.
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How do Implicit Costs affect business decisions?

They influence decisions by highlighting opportunity costs.
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Do implicit costs impact a company's financial statements?

Implicit costs are not recorded in financial statements but are crucial for evaluating economic profit.
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Dec 10, 2023

How do implicit costs affect decision-making in business?

Implicit costs influence decisions by highlighting the opportunity cost of using resources in one way rather than another.
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Can implicit costs be higher than explicit costs?

Yes, in some cases, implicit costs, like the value of the owner's time, can be higher than explicit costs, affecting overall profitability.
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Dec 10, 2023

Can implicit costs be avoided or eliminated?

Implicit costs are inherent and cannot be completely avoided as long as resources are being used.
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How do explicit costs affect pricing decisions?

Explicit costs influence pricing decisions because businesses need to cover these costs to be profitable.
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Can explicit costs include taxes and interest payments?

Yes, taxes and interest payments are examples of explicit costs for a business.
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Shumaila Saeed
Dec 10, 2023

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About Author
Shumaila Saeed
Written by
Shumaila Saeed
Shumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.

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