Reviewed by Oct 05, 2020| Updated on
Explicit costs are typical business costs which appear in the general ledger and have a direct impact on the profitability of a company. Examples of explicit costs include salaries, raw materials, utilities, lease payments, and other direct costs.
Explicit costs also referred to as accounting costs, are easy to determine and relate to the operating operations of a corporation to which the expenses are related. They are reported in the general ledger of a corporation and flow to the expenditures listed on the statement of income.
A business's Net Profit or Net Income (NI) represents the remaining residual profits after all specific expenses have been incurred. Explicit costs are the only accounting costs required to measure a profit, as they have a direct effect on the bottom line of a company. The specific cost metric is particularly useful for the long-term strategic planning of the businesses.
Explicit expenses include productive assets and monetary transactions and result in real market opportunities. Due to the paper trail, clear costs are easy to define, report and audit. Expenses related to ads, materials, services, inventories, and equipment purchased are examples of specific costs.
Even though the depreciation of an asset is not an operation that can be measured tangibly, the value of depreciation is an actual cost since it is related to the cost of the underlying asset owned by the business.
In comparison, implicit or inferred costs are not explicitly described, recorded, or documented as expenses. They often deal with intangibles and are described as the cost of opportunity—the value of not accepted best alternatives.
An example of an implied expense is time spent on one business operation, which could be better spent on a specific endeavour. Management will use explicit costs when analysing the activities of a company, including profits; but will only use implied costs for decision making or choosing between several alternatives.