Other names of variable costs are Prime Cost, Avoidable Cost, or Direct Cost. In other words, variable cost is the cost spent on variable factors such as power, direct labour, raw material, etc. The amount spent on these factors changes with the change in output level. Also, these costs arise till there is production and become zero at zero output level.

The following table summarises the main points of difference between accounting profit and economic profit. Opportunity costs can be looked at as the value of the next best opportunity, the choice that company executives decided against making. It can leave the money in the account, where it will earn a 10% annual interest – $1,500. Alternatively, it can spend the money on advertising its new product line.

Other names of fixed costs are Supplementary Cost, Overhead Cost, Unavoidable Cost, Indirect Cost, or General Cost. Fixed cost is the cost spent on fixed factors such as land, building, machinery, etc. The amount spent on these factors cannot be changed in the short run. Also, the payment made on these factors remains the same whether the output is small, large, or zero. For example, if an entrepreneur decides to start their own business, the implicit costs may include the value of their time and skills that could have been used in alternative employment opportunities. While there may not be any actual financial outlay, the opportunity cost of starting the business includes the forgone income from alternative employment.

The Difference between implicit and explicit costs

By keeping the record of the explicit costs, businesses can control costs. Yes, explicit costs can be reduced or controlled through various cost-cutting measures, negotiation strategies, efficient resource allocation, and effective financial management practices. Explicit costs are integral in investment and expansion decisions as they represent the measurable expenses incurred when acquiring new assets, expanding operations, or undertaking projects. These costs include tangible assets such as equipment, machinery, labor, construction, and administrative expenses. Explicit costs help determine the minimum price at which products should be sold to cover expenses and achieve desired profit margins.

You can aggregate the business expenses in the general ledger or the income statement to determine your company’s explicit costs. Explicit costs refer to monetary transactions made to others that result in cash outflows. These costs include wages, rent, utilities, advertisements, raw materials, and other general, administrative, and sales-related expenses. Maybe Eryn values her leisure time, and starting her own firm would require her to put in more hours than at the corporate firm. In this case, the lost leisure would also be an implicit cost that would subtract from economic profits.

Explicit costs are the direct, out-of-pocket expenses a business incurs during its operations. These costs are tangible and are easily measurable because they involve actual cash transactions. Essentially, explicit costs refer to the payments a business makes for goods and services used in the production process. They are typically recorded in a company’s financial statements, such as income statements, and are used to calculate profit margins. Implicit costs, also known as imputed costs or opportunity costs, are the alternative benefits or opportunities foregone when a particular decision is made. Unlike explicit costs, implicit costs do not involve actual monetary payments but represent the value of resources employed in their next best alternative use.

Methods of calculating explicit costs

• It includes expenses that impact the profitability of a business—raw material, wages, rent, administrative charges, and sales expenses.
• Unlike implicit costs, you can accurately measure explicit costs, making them a more simple reference point when evaluating a company’s financial health.
• The following table summarises the main points of difference between implicit cost and explicit cost.

These costs directly impact profitability, budgeting, pricing, and financial planning. By understanding and accurately accounting for explicit costs, businesses can make informed decisions, optimize operations, and ensure their long-term success. Whether for a small business or a large corporation, recognizing and controlling explicit costs is critical to maintaining a healthy financial position. Explicit costs are expenses borne directly during production process or daily operations of a business. Implicit costs are not direct expenses incurred, but are potential profits/benefits foregone by firms due to conducting business.

Another way to calculate Marginal Cost:

Explicit costs provide compliance along with accounting standards and reporting information, which provide accurate information to stakeholders in their business. Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.

Uses of accounting profit and economic profit figures:

Explicit cost involves actual payments made for factors of production, goods, or services. These costs are visible and tangible, making them relatively easy to track. Effectively managing explicit costs is crucial for individuals and businesses alike, as it affects profitability and overall financial well-being. Economic profit goes beyond accounting profit by considering both explicit and implicit costs, providing a more accurate measure of a business’s overall financial explicit cost performance. Implicit cost allows us to make informed decisions by identifying opportunity cost.

When you precisely grasp the costs of manufacturing and delivering your goods or services to customers, you can set competitive and accurate pricing. By following these steps and paying careful attention to explicit costs, you can optimize your financial resources and drive success in your personal or business endeavors. Accounting profit is used to evaluate the financial performance of a business for a specific period of time. This helps various stakeholders in making better financial decisions. Implicit cost is the opportunity cost of making a decision, and it is considered an expense in economics. Let’s understand the concepts of accounting profit and economic profit with the help of calculation examples.

Definition: Explicit and Implicit Costs

For established businesses, explicit costs remain an ongoing consideration to maintain efficient financial management. These quantifiable and identifiable expenses encompass various operational aspects such as wages, utilities, raw materials, and marketing expenditures. Explicit costs include direct expenses like raw materials, labor, overhead, and equipment, which are straightforward to quantify. By thoroughly analyzing explicit costs, businesses can accurately assess the cost implications of both options and determine which approach is more cost-effective. An explicit costs are measurable and will be included in profit/loss accounts. For example, if the firm hires a new worker, their salary will be an explicit cost which will be put on the accounting balance sheet.

• Pre-opening startup costs consist of business plan expenses, research costs, borrowing expenses, and technology investments.
• Disclosure of economic profit through financial statements or other means is not required.
• Once the output increases till the optimum level, the average cost starts to rise.
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Explicit Cost Meaning

Recording costs correctly and using appropriate software mitigates inaccuracies and keeps the business on track. Accounting profit helps to calculate taxes and provide compliance with financial performance and regulations. The following table summarises the main points of difference between implicit cost and explicit cost.

There are different types of costs, and in my student life, I remained confused about the true meaning and use of different types of costs in decision-making. In this article, I will explain the meaning of implicit and explicit costs and their use in decision-making. Explicit is a term that denotes something which is obvious and can be expressed. In contrast, “implicit” refers to indirect or something that is implied. Such costs emerge when the company relinquishes the alternative use of its resources to generate income—meanwhile pooling it into another project. The costs on which the output level has a direct impact are known as Variable Costs.