Imputed Cost

Imputed Cost

Investopedia / Xiaojie Liu

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 the cost arising from 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 costs do not appear on financial statements.

Imputed costs are also known as "implicit costs," "implied costs," or "opportunity costs."

Key Takeaways

  • Imputed costs are those incurred when using an asset as opposed to investing it or the costs arising from following one particular action and foregoing another.
  • Imputed costs are hidden costs as they are not explicit and, therefore, do not appear on financial statements. This means that there is no cash outlay for an imputed cost.
  • An imputed cost is also known as an "implicit cost", an "implied cost", or an "opportunity cost."

Understanding an Imputed Cost

Imputed costs are the costs associated with allocating resources to one course of action, thereby foregoing any possible benefits generated from any other option of utilizing those same resources. Because resources are limited, individuals cannot allocate them to every option, thereby having to choose one.

For example, if an individual decided to go to graduate school instead of working at a job, the imputed cost would be the salary they gave up during the time they are at school.

Imputed costs are hidden and do not involve an outlay of cash, therefore, not of primary importance in management budgeting policies, however, they are important to consider when deciding how to allocate resources. 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.

Imputed costs are usually incorporated when calculating economic costs. Economic costs would be both imputed costs and explicit 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 the 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.