“Explicit costs” are costs that can be recorded and measured. The importance of explicit cost as a category is related to the importance of implicit cost, its contrary. Implicit cost refers to unmeasurable or unknowable costs. In contrast, explicit cost refers to costs that can be known and measured. It is important to distinguish between explicit costs and implicit costs.
What is Explicit Cost?
“Explicit cost” refers to costs that are easily recorded and measured. The word “explicit” derives ultimately from the Latin verb explicare “to unfold, unravel”. The Latin word explicare is a compound formed from the prefix ex- meaning “out” and the verb plicare “to fold”. When something is “explicit”, it is visible and easy to explain. Costs that are visible and easy to explain are called “explicit costs”.
What is the Importance of Explicit Cost?
The importance of explicit cost lies in its contrast with implicit cost. The importance of explicit cost in general is coincident with the importance of the simple notion of “cost”. Explicit costs are costs that are documented. Costs that are documented are recorded systematically using accounting practices. The costs that are documented using accounting practices are included in a company’s financial statements, and are called “explicit costs”. In contrast, implicit costs are costs that cannot be measured using accounting practices. There is also opportunity cost which is the profit that an individual, investor, or business misses out on since they choose one alternative over another.
Where do Explicit Costs Appear?
Explicit costs appear in business documents. Business documents include things like receipts, record books, and financial statements. Implicit costs cannot be recorded, in contrast. The distinction between explicit and implicit costs lends importance to the notion of explicit costs. The paired concepts of explicit and implicit costs allow for costs that can be recorded to be distinguished conceptually from costs that cannot be recorded.
What are Examples of Explicit Costs?
The following lines list examples of explicit costs.
1. Wages
Wages are an example of explicit costs. Companies pay wages to their employees. The wages that companies pay to their employees are definite, measurable sums. Definite, measurable sums are sums that can be recorded. Costs that can be recorded are explicit costs. Wages are thus considered explicit costs.
2. Utilities
Companies pay for utilities. Utilities include things like electricity and water supplies. The amounts that companies pay for utilities are definite, measurable sums. Definite, measurable sums are sums that can be recorded. Costs that can be recorded are explicit costs. Utilities are thus considered explicit costs.
3. Lease Payments
Companies pay lease payments on buildings and equipment. The amounts that companies pay for lease payments are definite, measurable sums. Definite, measurable sums are sums that can be recorded. Costs that can be recorded are explicit costs. Lease payments are thus considered explicit costs.
4. Raw Materials
Companies buy raw materials. Raw materials are the materials from which companies produce finished products. The amounts that companies pay for raw materials are definite, measurable sums. Definite, measurable sums are sums that can be recorded. Costs that can be recorded
are explicit costs. Raw materials payments are thus considered explicit costs.
How is Explicit Cost Calculated?
Explicit cost is calculated by adding up all of the measurable costs that a company incurs. First, calculate wages. Then, calculate utility costs. Next, calculate lease payments. Subsequently, calculate raw materials costs. Finally, add up the costs for wages, utilities, lease payments, and raw materials. The sum of these and any other explicit costs are the total explicit costs for the company concerned.
Are Explicit Costs Important?
Yes, explicit costs are important. Explicit costs are important for determining the financial health of a company. The financial health of a given company is reflected directly in the explicit costs it incurs, relative to the income it receives. Explicit costs can be measured. The fact that explicit costs can be measured makes them easier to refer to than implicit costs when judging the financial health of a company.
What is the Difference between Explicit Cost and Implicit Cost?
The difference between explicit cost and the implicit cost is the difference between explicit and implicit. Something is “explicit” when it is distinctly visible and measurable. The literal sense of “explicit” derives from its Latin origin explicare “to fold out”. Something is implicit when it is not distinctly visible and measurable. The literal sense of “implicit” derives from its Latin origin implicare “to fold in”. When something is “folded out”, it is visible in its entirety. When something is “folded in”, it is not visible in its entirety. Costs that are explicit are visible and measurable. Costs that are implicit are not visible and measurable.
