Implicit cost defines the cost that has already been spent but has not been reported or shown as a distinct expense that a company had. Referred to as implied, notional, or imputed costs, implicit cost show that when a business allocates resources, it eliminates the capacity of earning income off the use of resources in other areas, which is why there is no exchange of money.
Explanation:
Implicit costs are not easy to quantify, which is why organizations do not always record them for accounting purposes because the money is not transferred from one party to another. Therefore, the costs are associated with the loss of possible income but not profits.
Implicit cost examples are varied and depend on the nature of a business that organizations are pursuing. For instance, when a company plans on hiring new employees, there are implicit costs required to invest in training and adaptation. While the cost does not have a positive influence on profits, having a skilled employee is a generally desirable outcome.
In decisions associated with corporate finances, implicit costs should always be taken into consideration when analyzing the ways in which resources should be allocated. It is also important to understand the difference between the implicit costs definition and explicit costs. The latter represent an exchange of money or the employment of actual resources by an organization. Ranging from office rent to workers’ salaries, explicit costs have a direct impact on the loss of profits, which is why they are reported in organizations’ financial statements.
