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."
Understanding 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.