Definition of Implicit cost:
An implicit cost is any cost that has already occurred but not necessarily shown or reported as a separate expense. It represents an opportunity cost that arises when a company uses internal resources toward a project without any explicit compensation for the utilization of resources. This means when a company allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere, so there's no exchange of cash. Put simply, an implicit cost comes from the use of an asset, rather than renting or buying it.
Implicit costs are also referred to as imputed, implied, or notional costs. These costs aren't easy to quantify. That's because businesses don’t necessarily record implicit costs for accounting purposes as money does not change hands.
The costs associated with an actions tradeoff. It is related to explicit costs, which represent the actual costs of an activity, and represents a cost that is not recorded but instead implied. For example, an employee could take a vacation and travel. The explicit costs would include travel expenses, the cost of a hotel room, and costs related to entertainment. The implicit costs relate to the tradeoff, namely the wages that the employee could have earned if the vacation was not taken.
As another example, not paying rent on the self-owned property (called implicit rent) is an implicit cost, because rent is a tax deductible expense but implicit rent is not. Similarly, implicit cost of liquid assets or stockholders (shareholders) capital is the maximum interest that would be earned on them as a fixed deposit or as an investment in a mutual fund (unit trust). Implicit costs must be added to actual cash outlays to establish a true estimate of the cost of production or of running a business. Also called imputed cost, implied cost, or notional cost.
How to use Implicit cost in a sentence?
- These costs are in contrast to explicit costs, which represent money exchanged or the use of tangible resources by a company.
- Sometimes there may be an implicit cost to an action but the gain may outweigh it so much that you just have to pay.
- An implicit cost is a cost that exists without the exchange of cash and is not recorded for accounting purposes.
- Examples of implicit costs include a small business owner who may forgo a salary in the early stages of operations to increase revenue.
- The implicit cost was to be considered as there were many options and alternatives to consider in making the decision.
- Implicit costs represent the loss of income but do not represent a loss of profit.
- The implicit cost would be too high for us to handle, so I told them that the deal was off and to go on about their day.
Meaning of Implicit cost & Implicit cost Definition