Explicit costs are clearly stated costs incurred by the business. For example, employee salaries, inputs, utility bills, and rent, among others. These are expenses that are stated in the balance sheet of the business.
On the other hand, implicit costs are costs that are incurred, but not seen. In other words, these are costs that are not directly related to expenses. For example, a factory may close on the day so that its machines can be serviced. The explicit cost to repair the machine is IDR 100,000,000. However, the factory had lost production throughout the day which resulted in a production loss of Rp. 500,000,000. These indirect costs are known as implicit costs.
Explicit costs are costs that are clearly stated on the company’s balance sheet, while implicit costs are not. Rather, it is an indirect cost for selecting a particular destination. When combined together, the explicit and implicit costs form what is known as the total economic cost. This is because the cost of choosing option A has an explicit cost as well as an implicit cost of what could have been achieved otherwise.
An explicit fee is one which is a clear and clear monetary amount made by the company. It has a clear monetary amount which can be seen in the balance sheet of the company. These examples include:
– Advertising and marketing costs.
– Employee salaries, bonuses, commissions and other compensation to employees.
– Employee benefits not paid directly to employees, e.g. wellness, restaurant staff, or gym staff.
– Equipment that businesses buy to make production and output more efficient.
– Rent or other mortgage payments required for land used by the company.
– Inventories needed by the company to supply its output to consumers.
– Taxes and legal fees.
– Utilities needed to keep the company running such as electricity, water and internet services.
While explicit costs have a certain value, implicit costs are not always so obvious. For example, spending 5 hours playing video games means that 5 hours can’t be used for studying. The implicit cost is the hours that could have been spent studying. Value that does not need to be measured in monetary terms, but is still considered a cost.
– Lost interest on funds occurs when the company uses its capital, which means sacrificing the interest that can be earned on interest.
– New employee training incurs an implicit cost in the fact that those seven hours can be spent doing other work.
– Going to University means there is an implicit fee which is money that can be earned during that period.
– Maintenance which means the company has to temporarily stop production which can lead to lower output levels or dissatisfied customers.
To understand what an implicit cost is and what an explicit cost is, we provide a simple illustration below:
To meet the soaring demand quota, PT. XYZ decided to increase its production capacity. The finished goods will eventually be put into the warehouse before finally being distributed. The high production capacity makes the existing warehouse unable to accommodate the large number of existing goods. The company finally decided to use another warehouse it owned.
Due to the increasing demand in the community, PT. XYZ decided to increase its production capacity, but the current production machines cannot provide the expected production output. The company finally decided to buy a new machine to be able to ramp up production. In addition to buying additional machines, the company also has to buy more extra raw materials than during normal production.
The first example where the company uses its own warehouse is called the implicit cost, which is the amount of money that will be lost when an action is not taken. Pay attention, can’t PT. XYZ generate income from renting out existing warehouses, say Rp. 100 million per year. Instead of renting out the warehouse, the company then uses its internal resources to assist the interests of its own production process. This usd 100 million is called the implicit cost. Opportunities to get it will be lost because the company ultimately decides to use its internal resources.
Well, basically this implicit cost can’t actually be calculated objectively and accurately. The figure of usd 100 million above is only an example if it is rented out, but basically the value at that time was unknown, how much was the rental price and how long the lease was. That’s why it doesn’t appear in a financial report, and if it does, a separate report will be used to assist stakeholders in making effective decisions for the company in the future.
What is the difference between implicit cost and explicit cost?
The second example above, where the company buys a new production machine and raw materials, is an explicit cost, which is a cost that is actually incurred, incurred or sacrificed by the company for its production or operational needs. This explicit cost will of course be included in the company’s financial statements because its value can be calculated clearly. For example, in the example above, the company ultimately has to buy a new machine that costs usd 200 million, so this usd 200 million is called the explicit cost.
This explicit cost is also divided into 2, namely those whose costs are fixed and fixed costs, and those whose costs are variable or variable costs, calculated for one accounting period. Examples of fixed, explicit costs such as building rental costs, vehicle costs, equipment and supplies costs, and so on. For explicit costs whose values change, for example, employee salaries, the cost of purchasing raw materials which of course is adjusted to the level of production, the cost of office equipment or stationery, transportation or distribution costs, other costs related to the production process, for example the cost of electricity, water, telephone, and others. etc.
Difference between implicit and explicit cost
– Implicit costs are not recorded in the balance sheet, while explicit costs are recorded.
– Implicit costs are included in opportunity costs, while explicit costs are included in company expenses.
– Calculating implicit cost is much more difficult because there is no exact measure. It is different from explicit costs, where the costs are clear and there is proof of receipt.
– Implicit costs help calculate overall economic profit, while explicit costs help calculate profits and losses in accounting reports.
