Implicit Cost

What is an Implicit Cost?

An implicit cost is the one that has occurred already, but not specifically reported or shown as a separate expenditure. It signifies an Opportunity Cost, arising when a firm uses internal resources for a project, without putting any explicit compensation for using those resources.

In simple words, when a firm assigns resources, it forgoes the competency to earn money without using those resources anywhere else; thus, there is no cash exchange. Basically, an implicit cost is the one that comes from an asset use instead of buying or renting it.

Explaining Implicit Costs

Implicit cost is also known as notional, implied, or imputed cost. It is definitely not easy to quantify this cost type. The reason behind this is that businesses don’t record implicit costs for the purpose of Accounting.

Such a cost represents the loss of potential Income; however, no loss of profits. Generally, it is the type of opportunity cost, which is the sort of advantage that the firm ignores by selecting one alternative or option versus another.

Furthermore, the implicit cost might be the amount that a firm misses out on for selecting to use internal resources versus charging a third-party to use the same resources. For instance, a firm might earn income from renting its commercial building versus earn revenue by using the same building for producing and selling products.

Also, a company may include implicit costs in the form of cost of doing business as they signify potential income sources. Economists include both regular and implicit costs while calculating the total economic profit.

Examples of Implicit Costs

Some of the basic implicit cost examples include the Depreciation of machinery for a specific Capital project and the loss of interest on funds. They could be intangible costs as well that are not accounted for easily, such as when the owner allocated time for a specific project instead of using those hours anywhere else.

When a firm hires new employees, there could be an implicit expenditure to train those employees. Let’s take another example. Suppose a manager is taking 7 hours from an existing employee’s day to train a new team member, then the implicit cost would be:

The hourly wage of the existing employee x 7

The reason behind this is that hours can easily be allocated to the current role of the employee.