What is an 'Imputed Cost'

An imputed cost is a cost that is incurred by virtue of using an asset instead of investing it or undertaking an alternative course of action. An imputed cost is an invisible cost that is not incurred directly, as opposed to an explicit cost, which is incurred directly.

Imputed cost is also known as "implicit cost," "implied cost," or "opportunity cost."

BREAKING DOWN 'Imputed Cost'

Imputed costs are hidden and therefore not of primary importance in management budgeting policies. Explicit costs can be easily identified and planned for, so they get most of the attention. Imputed costs may be calculated in situations where alternative uses of an asset are under consideration, but businesses generally adhere to consistent usage of assets to run operations. The usage of these assets generates expenses that are recorded on their books. There is no formal accounting for imputed costs.

Examples of Imputed Costs

Suppose a company owns an office building in the central business district of a city where managerial and administrative staff work. The company's manufacturing site is located outside the city. The company could decide to relocate the workers to the manufacturing location and sell or rent the downtown office building. The imputed costs, in this case, are the proceeds from the sale of the building or amount of rental income the company could earn from leasing it to another party. The staff stays put, and only explicit costs associated with using the building, such as maintenance, utilities and depreciation, are booked on the income statement.

As another example, suppose a company is sitting on a pile of cash that earns only 150 basis points in a money market account. Meanwhile, alternative risk-free securities are yielding 2%. The imputed cost is 50 basis points, the foregone amount that the company would be earning if it invested the cash in the higher-yielding securities.

RELATED TERMS
  1. Imputed Value

    Imputed value is an assumed value given to an item when the actual ...
  2. Dividend Imputation

    A dividend imputation is an arrangement that eliminates or reduces ...
  3. Franked Investment Income

    Franked investment income (FII) is income that is received as ...
  4. Explicit Cost

    An explicit cost is an easily identified expenditure that is ...
  5. Value Of Risk (VOR)

    Value Of Risk (VOR) is the financial benefit that a risk-taking ...
  6. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
Related Articles
  1. Managing Wealth

    Cost Basis 101: How To Correctly Understand It

    Understanding how to calculate cost basis is critical for tracking the gains or losses of an investment, and what the tax consequences on it are.
  2. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  3. Investing

    The Hidden Costs Of Investing In Mutual Funds

    Find the hidden fees in your portfolio, so that you can increase your rate of return.
  4. Personal Finance

    Accountant: Career Path & Qualifications

    Learn the different career paths a new accountant can take, and understand the educational requirements for the career, which vary based on position.
  5. Retirement

    Retirement Living: Renting vs. Home Ownership

    There are many things to consider when deciding whether to own a home or rent after you retire. Read the risk and things to consider a senior should know.
  6. Investing

    Accounting For Differences in Oil and Gas Accounting

    How a company accounts for its expenses affects how its net income and cash flow numbers are reported.
  7. Investing

    Are Alternative Mutual Funds, ETFs Right for You? (MORN)

    Alternative mutual fund and ETFs are gaining popularity but are they a good idea for your regular Joe investor?
  8. Trading

    How & Why Interest Rates Affect Futures

    There are at least four factors that affect change in futures prices, including risk free-interest rates, particularly in a no-arbitrage environment.
  9. Small Business

    Business Startup Costs: It's in the Details

    Don't overlook the details when starting up a business; it's the small expenses that have the potential to make or break a great idea.
RELATED FAQS
  1. How are period costs and product costs different?

    Product costs are the direct costs involved in producing a product. Period costs are all costs not included in product costs ... Read Answer >>
  2. What are typical examples of capitalized costs within a company?

    Learn examples of company capitalized costs, including expenses incurred to put fixed assets, software development costs, ... Read Answer >>
  3. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management with budgeting and controlling ... Read Answer >>
  4. What is cost accounting?

    Learn about the main benefits of cost accounting systems, how they are different from financial accounting and why they are ... Read Answer >>
  5. How Do Fixed and Variable Costs Affect the Marginal Cost of Production?

    Learn about the marginal cost of production and how it is affected by changes in fixed and variable costs. Read Answer >>
Trading Center