Implicit Cost

Reviewed by Sujaini | Updated on Sep 28, 2020

What is an Implicit Cost?

An implicit cost is any cost already incurred but not explicitly expressed or reported as a separate expense. It reflects the value of opportunity that occurs when an organisation uses internal capital for a project without any precise reimbursement for resource use.

This means that when a company allocates its resources, the ability to earn money from resource and use elsewhere is always forgotten, so there is no cash exchange. Simply put, an implicit cost stems from the use of an asset, rather than renting or purchasing it.

Breaking Down Implicit Costs

Implicit costs are also called values imputed, implied, or notional. It's not easy to quantify those costs. That's because for accounting purposes companies don't typically report indirect expenses because money doesn't change hands.

These costs are a loss of potential revenue but not of profits. A company may choose to include these costs as the cost of doing business as they represent potential revenue sources. Definitions of tacit expenses include loss of interest income on funds and equipment depreciation for a construction project.

Difference Between Implicit Costs and Explicit Costs

Technically, tacit expenses are not recorded and cannot be reliably calculated for accounting purposes. The knowledge of implicit costs does not require cash exchanges. But they are an essential consideration, as they help managers make effective business decisions.

Those costs contrast considerably with specific charges, the other broad categorisation of business expenses. These reflect any costs incurred by a corporation in paying cash or other measurable resources. Rent, salaries, and other operating expenses are known as transparent costs. They are all recorded in the financial statements of an enterprise.

The main difference between the two types of costs is that implicit costs are the cost of opportunity. In contrast, explicit expenses are expenses paid with the proper tangible assets of a company. That makes implicit prices synonymous with imputed values, while explicit costs are considered to be out-of-pocket costs.

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