Depending upon the payment, costs are categorized into two categories; Explicit Costs and Implicit Costs. Explicit cost is actually sustained by the organization during production, whereas the implicit cost is not directly incurred by the organization, these cost are implied in nature which do not involve a cash payment. The explicit is also known as out of pocket cost, while the implicit cost is known as an opportunity cost.
The following are the key differences between explicit cost and implicit cost
- Explicit cost is experienced when the unit has to pay for the utilization of factors of production. Implicit cost is opportunity cost, which is occurred when the entity uses the proprietor’s resources like capital inventory etc.
- Explicit cost is known as out-of-pocket cost while Implicit cost is known as imputed cost.
- Explicit cost can be simply determined, but it is just reverse in the case of Implicit cost as it does not have any paper track.
- The amount of Explicit Cost is objective in nature for it is essentially incurred whereas Implicit cost follows indirectly and that is why its extent is subjective.
- Explicit cost aids in the calculation both the accounting profit and economic profit. On the other hand, Implicit cost aids in the calculation of only economic profit.
- Explicit cost is documented and reported to the management. On the other hand, the implicit cost is neither documented nor reported to the management.
Conclusion
An industry may acquire explicit costs from a variety of sources, whereas implicit costs are difficult to quantify. But, the company sustains both the cost and takes decisions keeping both the costs in consideration.
finance Management 