Implicit Cost

Implicit cost is a cost that is represented by the lost opportunity in the use of a company's own resources, excluding cash. The implicit cost are the costs of an enterprise that does not require direct expenditure, it results from a loss in the potential revenue. The implicit costs results if a person is willing to forego the satisfaction in the search of an activity and is not rewarded by money and in any other form of payment. It begins and ends with foregoing the satisfaction and benefits. An implicit cost is an indirect intangible cost. An example of an implicit cost is Goodwill.                           

Implicit cost is the cost that is associated with an action’s tradeoff. It represents the explicit cost, which is the actual cost of an activity and is related to a cost that is not recorded but is instead applied. For example, if an employee goes on a vacation, the explicit costs represent the expenses of the hotel room and other costs. Whereas the implicit costs indicates the tradeoff, i.e. the salary that the employee could have earned if he had not gone for a vacation.

The implicit cost for some enterprises is the result of the total time taken by a person to complete the project and the value of that person’s time. For example if a contractor hires a plumber to complete a job. The contractor must charge enough to cover both the implicit and explicit costs to make a profit. Implicit costs cannot be traded and hence it cannot be counted in terms of money.

Implicit cost is an important concept in determining the cost of completing projects. If a person does an extra work added to his or her work without an extra pay, then he/ she incurs an implicit cost. In case another person is hired to do the work, then an explicit cost is incurred as the hired person would be paid the wages.

Questions

• What is implicit cost?
• With the help of examples explain how implicit costs differ from explicit costs?