Explicit and Implicit Costs
Explicit Costs refer to the actual expenditures of the firm to hire, rent or purchase the input it requires in production. These include the wages to hire labour, the rental price of capital, equipment and buildings and the purchase prices of raw materials and semi finished products.
These are the recorded expenditure during the process of production. They are thus also known as accounting cost or money cost, as these are actual monetary expenditures incurred by the firm.
Explicit costs are those cost which are actually incurred and therefore are recorded in the books of accounts by the company. Example of it is rent paid, salary paid to workers, price paid for raw materials etc. Explicit costs are also called accounting costs. In other words there is outlay of cash from the company in case of explicit costs
Implicit Costs: Implicit cost arises in the case of those factors, which are possessed and supplied by the entrepreneur himself. There is no contractual obligation for payment to anyone else in order to obtain these factor units.
But, the factor units are responsible for costs, since they could be supplied to other producers for contractual sum, if they were not used in this business.
In the economic sense there are certain costs which are implicit in nature. This refers to the value of the inputs owned and used by the firm in its own production activity.
Implicit costs include the highest salary that the entrepreneur can earn for him, the highest return the firm could receive from investing its capital in alternatives uses or renting its land and buildings to the highest bidder rather than using them itself.
In general, following are the implicit costs, which should be included in the total cost, but go unrecorded in the account of the firm
- Wages of labour rendered by the entrepreneur himself.
- Interest on capital supplied by the entrepreneurs.
- Rent of land and premises belonging to the entrepreneurs and used in the production.
- Normal profit of entrepreneur, compensation for being the ultimate risk taker in the firm.
Powered By 360Presence
Project Time Cost Trade-off Project Time Cost Trade-off Project Time Cost Trade-off Project Time Cost Trade-off