Difference between Explicit Cost and Implicit Cost

Difference between Explicit Cost and Implicit Cost

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, labour 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 of Pocket costs. The explicit costs can be determined easily in the market and require cash physical outflow of cash. Therefore, these are the costs which 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 owner’s building and estimated wages to family labour 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 of 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 outflow of cash.

Used By

These costs are used by economists as well as Accountants.

These costs are used by economists only.


Download the chart:-

If you want to download the chart please download the following image and PDF file:-

Difference between Explicit Cost and Implicit Cost 150x150 - Difference between Explicit Cost and Implicit Cost
Difference between Explicit Cost and Implicit Cost
application pdf 150x150 - Difference between Explicit Cost and Implicit Cost
Difference between Explicit Cost and Implicit Cost

 

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 os directly paid by the owner, it is explicit cost and if the same is borne by owner indirectly without paying or using its own resources, it is an implicit cost. However, th company or business considers both costs while taking decisions in the management.

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