Explicit memory refers to information that takes effort to remember—the kind we need to think hard about to dig out of our memory bank. Implicit memory, on the other hand, refers to information we can recall very easily or even unconsciously. For example, if a company uses an internal resource over a third party, it may miss out on revenue from using the third party. Such as a company that owns a building that they use for internal manufacturing purposes rather than renting it out to others to accrue an earned revenue from a third party. So depreciation is a Deemed Explicit Cost, as the cost of the asset is apportioned during the useful life of the asset.

By analyzing both, businesses can make more informed decisions about resource allocation, investments, and potential cost-saving measures. This comprehensive understanding can lead to more strategic business planning and improved financial the three types of accounting and why they matter to your business health. Opportunity cost is closely related to implicit cost, but they are not exactly the same. Opportunity cost refers to the potential benefits that a business misses out on when choosing one alternative over another.

However, on the basis of payments, two major types of costs are explicit costs and implicit costs.
For example, if a company uses an internal resource over a third party, it may miss out on revenue from using the third party.
An implicit cost is any cost that has already occurred but not necessarily shown or reported as a separate expense.

While explicit costs affect a company’s accounting profit, implicit costs influence its economic profit. Explicit vs implicit cost is a hot topic discussed in the world of accounting. The major difference between these two types of costs lies in the implicit cost being opportunity costs and explicit costs being expenses paid with the business’s tangible assets. Implicit costs are opportunity costs synonymous with imputed costs. These are incredibly subjective costs but can help leadership teams calculate economic profit for the business.

Explicit costs vs implicit costs

Explicit costs represent any costs involved in the payment of cash or another tangible resource by a company. Rent, salary, and other operating expenses are considered explicit costs. They are all recorded within a company’s financial statements. To calculate explicit costs, businesses can simply total all the direct payments made for business operations, such as rent, salaries, utilities, and raw materials.

On the contrary, the measurement of implicit cost is subjective in nature because they are incurred indirectly and have no track. They are the value of benefits sacrificed to do business and can only be estimated. Explicit Costs are the costs which involve an immediate outlay of cash from the business. The cost is incurred when any production process is going on, or activity is conducted in the normal course of business. The cost is a charge for the use of factors of production like land, labour, capital and so on. They are in the form of rent, salary, material, wages, and other expenses like electricity, stationery, postage, etc.

Implicit costs:

These costs have already occurred but may not be tracked or reported as separate expenses. These could be opportunity costs, such as when a company uses an asset they already have rather than renting or buying it. Implicit costs are costs that occur due to a specific path or option being chosen. It represents an opportunity cost when the firm uses resources for one use over another. For example, a manager may need to train their staff, which requires 8 hours of their time.

Stay up to date on the latest accounting tips and training

Sometimes, it means “inherent.” This is how it’s used in the phrase implicit bias, which refers to a prejudice that someone has without knowing it. The words explicit and implicit also have other senses that are used in particular contexts. For example, the word explicit can mean that something has sexual or inappropriate content, as in explicit lyrics or This interview features explicit language. Let’s say you are a fresh business owner and just beginning your first business.

implicit vs. explicit costs

Financial accounting and reporting, being a compulsory task for every business, requires companies to immediately report and account for all business transactions. Hence, all explicit costs incurred are realized during the operations of a business and are reported and accounted for at every stage of business. When calculating the accounting profit, the total explicit costs are deducted from the total revenue realized during the period. If you’re running a business, one of your primary goals will be to make a profit. In order to find out what your profit is, you must understand what implicit and explicit costs are and how they differ.

Slightly less than half of all the workers in private firms are at the 17,000 large firms, meaning they employ more than 500 workers. Another 35% of workers in the U.S. economy are at firms with fewer than 100 workers. These small-scale businesses include everything from dentists and lawyers to businesses that mow lawns or clean houses. They provide the business with their skill in lieu of a salary, which becomes an implicit cost. An example of an implicit cost is having to deal with a fire alarm, which causes a factory to shut down for two hours.

Now that you have some background information on explicit vs. implicit costs, let’s take a look at how to calculate explicit cost and implicit cost for your business. Implicit costs are a little more complicated than explicit costs. Whereas explicit costs are more straightforward, implicit costs deal with intangible costs.

It might’ve been an explicit expense if you had received the salary. Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire.