In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly.
How do you find implicit cost?
CALCULATING IMPLICIT COSTS
- First you have to calculate the costs. You can take what you know about explicit costs and total them:
- Subtracting the explicit costs from the revenue gives you the accounting profit.
- You need to subtract both the explicit and implicit costs to determine the true economic profit.
What are the implicit costs of a business?
The implicit costs, or implied costs, of a business refer to resources that may be underutilized for generating profit. However, to determine the total economic profitability, both implicit and explicit costs are taken into consideration.
What’s the difference between economic profit and explicit cost?
It means total revenue minus explicit costs—the difference between dollars brought in and dollars paid out. Economic profit is total revenue minus total cost, which includes both explicit and implicit costs. The difference is important.
Why does accounting profit not take implicit cost into account?
Additionally, the accounting profit does not take implicit cost into account, and the accounting profit can be a simplistic view of a company’s profitability rather than its overall economic success in the market industry.
Are there any cash exchanges for implicit costs?
Implicit costs are technically not incurred and therefore cannot be measured accurately for accounting purposes. There are no cash exchanges in the realization of implicit costs. However, they are important costs to ascertain because they help managers make effective decisions on behalf of the company.
