The basic difference between Explicit Cost and Implicit Cost is that Explicit Cost refers to the expenditure paid to an external party for purchasing inputs whereas Implicit Cost refers to the imputed cost of self-owned inputs.
To know the difference between these two, we must clear the meaning of these terms:
Meaning of Explicit Cost:-
It refers to the expenditure incurred by the producer to buy the inputs from the market. For example, the purchase of raw material, labor from the market, etc.
It can be measured as the cash payments that a firm makes to others for the purchase of inputs in the market. These are also known as Out Pocket costs. The explicit costs can be determined easily in the market and require cash physical outflow of cash. Therefore, these are the costs that are considered while calculating accounting profit as well as economic profit.
Meaning of Implicit Cost:-
It refers to the cost of using self-owned inputs. Therefore, the implicit cost refers to the estimated expenditure on the use of self-owned inputs. For example, estimated rent on the owner’s building and estimated wages to family labor, etc.
It is measured as imputed or estimated costs of self-owned and self-employed resources. Hence, implicit costs can be referred to as opportunity costs or imputed costs. The measurement or calculation of implicit costs is difficult as the producer doesn’t have to pay it in reality. Thus, these costs are considered only while calculating economic profit.
Chart of Difference between Explicit Cost and Implicit Cost :
|
Basis of Difference |
Explicit Cost |
Implicit Cost |
| Meaning | It refers to the expenditure incurred by the producer to buy inputs from the market. | It refers to the cost of self-owned inputs by the producer. |
|
Measurement |
This cost can be measured in terms of cash payments made by the firm to other parties. | It can be measured in terms of imputed costs of self-owned or self-employed resources. |
| Also known as | It can also be known as Out Pocket costs. | This cost can be known as Imputed Cost or Opportunity Cost. |
|
Consideration |
This cost is considered while calculating economic as well as accounting profit. | It is considered only in the calculation of economic profits. |
|
Recording |
This cost is well recorded in the books. | Explicit cost is not recorded in the books. |
|
Estimation |
It involves the objective estimation of cost. | It involves the subjective estimation of cost. |
|
Tracking |
These costs can easily be determined in the market. |
These costs cannot be traced and determined. |
|
Outflow of Cash |
It involves the outflow of cash. |
It doesn’t involve the outflow of cash. |
|
Used By |
These costs are used by economists as well as Accountants. |
These costs are used by economists only. |
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Conclusion:
Thus, these both costs stand for business activity. The thing which makes these both distinct is the linkage of cost with the business. If the cost is directly paid by the owner, it is an explicit cost and if the same is borne by the owner indirectly without paying or using its own resources, it is an implicit cost. However, the company or business considers both costs while taking decisions in the management.
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