Implicit costs are a type of opportunity cost that occurs when a company uses internal resources for a particular project without any explicit compensation for using those resources.
This also usually occurs when a company chooses between various alternative options for the use of certain assets.
Implicit costs can be measure accurately for the purpose of corporate accounting. These costs can also help every manager in making effective decisions for their company.
Because the type of implicit cost is a type of cost that cannot be assesse objectively and is not easy to measure, this type of cost does not occur in a company’s financial report.
In order to understand more clearly about this type of implicit cost, in this article we will discuss in more depth about implicit costs, examples of implicit costs, and how to calculate them.
Understanding Implicit Costs
Some of us may not know more clearly about what is meant by implicit costs. Implicit costs are a type of opportunity cost that is utilize in a company’s internal resources.
This type of cost will not be shown in the financial statements or is generally reporte as a separate cost.
Opportunity costs arise when a company uses its internal resources for a project or operational activity without any explicit compensation for using those company resources.
This type of cost is usually very difficult to calculate, Why? Because in calculating this implicit cost there is no physical exchange or cash exchange in its activities.
If a company decides to utilize its resources, there will be a potential loss of the ability to earn new money or profits from other activities on the resources owne by the company.
So, What Are Explicit Costs?
In addition to implicit costs, there are also explicit costs in the company. Of course, these two types of costs have different meanings. Explicit costs are costs that must be incurre by the company when it wants to obtain or produce something.
This type of cost can also be interprete as a real cost, which is a cost that must be incurre by other parties during the running of their business. The costs incurre are relate to various production factors that will have a direct impact on the company’s profitability.
In addition, these explicit costs are also contractual costs or fixe costs that include labor costs, inventory costs, and rental costs, utility costs, mortgage costs, production costs, and the company’s production machine costs.
Examples and How to Calculate Implicit Costs
Below we provide examples and how to calculate implicit costs:
Example 1
Let’s say a manufacturing company has its own building that they use to carry out their business operations and production activities.
Then, the company prefers to use its building for company operational activities rather than renting the building to other parties.
The company can generate a net profit of IDR 600 million every month, whereas if the building is rente to another party, the opportunity cost they can get is IDR 40 million per month.
How to calculate this implicit cost is very easy, as we know before there is an actual economic profit from the manufacturing company which is Rp 600 million, then we can subtract 40 million rupiah. This means that the implicit cost of the manufacturing company is 560 million rupiah per month.
For that, the company must be willing to lose its potential income of Rp 40 million. Well, this is what we usually call implicit costs.
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Example 2
Let’s say there is someone who wants to allocate Rp. 150 million that he can use to start a new business.
Then, the allocate money has the potential to earn deposit interest income of Rp 10 million per year if it is deposite in a bank. So, this Rp 10 million is what we usually call an implicit cost.
Examples of Explicit Costs
A company’s explicit costs can include employee salaries, payments made to purchase raw materials, business rent or mortgage payments, and other costs associate with purchasing the company’s manufacturing equipment.
Of these explicit costs, companies can consider rent or mortgage payments and the cost of purchasing production equipment as fixe costs.
For example, there is a company that buys a machine for Rp 50 million. So, the cost that must be paid is actual money or explicit cost.
Explicit costs, or what are commonly calle real costs, will involve direct financial payments and be paid to external parties to keep internal business operations running smoothly.
Things to Consider About Both Costs
For explicit costs or implicit costs, the company must be able to consider in terms of measuring production costs, which include:
- Include alternative costs or opportunity costs on all inputs, whether owne or purchase by the company. The reason is that the company will not be able to hold the rente input if the input is paid at a price lower than the price paytm data collection paid by other companies.
- Accounting or historical cost is very important for the company’s financial statements and also for taxes. When a managerial decision-making objective occurs, then economic cost or opportunity cost will be considere as the relevant cost concept that must be use by the company.
Closing
Thus our explanation of implicit costs. Although these costs are not include in the company’s financial statements, you still nee good. Ad phone number list correct bookkeeping reports to calculate every expense and income of your company.
Of course, you must be able to have a correct and accurate financial report. The goal is so that your company can manage business finances more easily and more accurately.
