Implicit Cost

Loading the player...

What is an 'Implicit Cost'

An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. It represents an opportunity cost that arises when a company allocates internal resources toward a project without any explicit compensation for the utilization of resources. This means that when a company allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere.

BREAKING DOWN 'Implicit Cost'

Examples of implicit costs include the loss of interest income on funds, and the depreciation of machinery for a capital project. Implicit costs can also be intangible costs that are not easily accounted for, such as situations in which an owner allocates time toward the maintenance of a company, rather than allocating those hours elsewhere. In most cases, implicit costs are not recorded for accounting purposes.

When a company hires a new employee, for example, there are implicit costs to train 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 hours could have been allocated toward the employee's current role. In corporate finance decisions, implicit costs should always be considered when coming to a decision on how to allocate company resources.

Difference Between Implicit and Explicit Costs

Implicit costs are technically not incurred and therefore cannot be measured accurately for accounting purposes. There are no cash exchanges in the realization of implicit costs. However, they are important costs to ascertain because they help managers make effective decisions on behalf of the company.

This is in stark contrast to explicit costs, the other broad categorization of business expenses. These costs represent any costs involved in the payment of cash or other tangible resource by a company. Rent, salary and other operating expenses are considered explicit costs and are recorded within 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. This makes implicit costs synonymous with imputed costs, while explicit costs are considered out-of-pocket costs. Implicit costs are harder to measure than explicit costs, which makes implicit costs more subjective than explicit ones. Implicit costs help managers calculate overall economic profit, while explicit costs are used to calculate accounting profit and economic profit.

RELATED TERMS
  1. Accounting Profit

    A company's total earnings, calculated according to Generally ...
  2. Absorbed Cost

    The indirect costs that are associated with manufacturing. Absorbed ...
  3. Applied Cost

    A term used in cost accounting to denote the cost assigned to ...
  4. Operating Cost

    Expenses associated with the maintenance and administration of ...
  5. Cost Of Revenue

    The total cost of manufacturing and delivering a product or service. ...
  6. Direct Cost

    A price that can be completely attributed to the production of ...
Related Articles
  1. Markets

    Understanding Implicit Costs

    An implicit cost is any cost associated with not taking a certain action.
  2. Markets

    What is Normal Profit?

    Normal profit is an economic term that means zero economic profit.
  3. Markets

    Calculating Economic Profit

    Economic profit is the difference between the revenue a firm earns from sales and the firm’s total opportunity costs.
  4. Investing

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  5. Markets

    What is the Cost of Funds?

    Cost of funds is the interest cost financial institutions pay to use the funds they deploy in their business.
  6. Personal Finance

    The Government And Risk: A Love-Hate Relationship

    Though the U.S. government can help its citizens by subsidizing risky loans, the costs always come back to the taxpayers.
  7. Investing

    The Cost Of Hiring A New Employee

    Hiring a new employee means more than just a salary ... a lot more.
  8. Investing

    Explaining Capitalized Cost

    A capitalized cost is an expense associated with a fixed asset that is added to the basis of that asset and expensed over its depreciable life.
  9. Personal Finance

    The Role Of Opportunity Cost In Financial Decision Making

    Opportunity cost is an essential, often overlooked aspect of financial decision making.
  10. Investing

    Explaining Accounting Profit

    Accounting profit is the net earnings of a business as calculated under Generally Accepted Accounting Principles (GAAP).
RELATED FAQS
  1. Which is more important to economists, the marginal propensity to consume or the ...

    Find out more about economic profit, the formula used for calculating economic profit and how to calculate a company's economic ... Read Answer >>
  2. My advisor has placed my money in an open ended fund. Are the costs [all hidden and ...

  3. What are the differences between period costs and product costs?

    Find out why GAAP separates all company expenses into either period or production costs and how this impacts the way expenses ... Read Answer >>
  4. How can I tell if a cost is a direct cost?

    Find out how to tell if a cost is a direct cost, why that's important and why direct costs don't tell the whole story about ... Read Answer >>
  5. What are the main advantages and disadvantages to the cost accounting method?

    Read a brief overview of the main advantages and disadvantages of the cost accounting method as it relates to business analysis ... Read Answer >>
  6. How do you calculate the ratio between debt and equity in the cost of capital

    Discover how to calculate the ratio between debt and equity when making cost of capital estimations using the weighted average ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center