Question

Explain the difference between explicit costs and implicit costs. - Explicit costs will involve outflow of cash due to the use of factors of production is called Explicit Cost. This is also known as Out-of-pocket Costs. This is an actual occurrence to a business. There will be recording and reporting of these costs. The Accounting and Economic Profit will help with calculating of this.
       EX: Salaries, rent, advertisement,wages, and so on.
       -Implicit Costs is in which there is no cash outlay and is known as an Implicit Cost. This is also known as Implied. There is no recording or reporting. It is subjective to estimation of cost and will only have Economic Profit to be calculated.
       EX: interest on owner’s capital, salary to the owner, the rent of owner’s building, and so on. These do not usually occur in reality.
   ii.   Explain who would care about them and why.

Answer 1

Explicit cost: These costs are incurred because of use of various factors of production such as labor. These costs are out of the pocket cost, example wages to the labors and there are proper records maintained for these costs.

Implicit cost: these costs are referred as the opportunity cost already existing resources of the firm. There is no record maintained for these costs, example of implicit cost are expanding business on the already existing land.

Both the cost is very important for business organizations, as the profit is calculated only after reducing all the costs from the total revenue earned by the firm. It is important for the firm to know its accounting profit as well as economic profit, and these two profits can be known only after knowing implicit and explicit cost.

The accounting profit is calculated after reducing explicit cost from the total revenue, and the economic profit is calculated after reducing total cost (implicit cost and explicit cost) from the total revenue.

Accounting Profit=Revenue-Explicit Costs.

Economic Profit=Total Revenue-Explicit Costs-Implicit Costs.

The privately owned firms always want to earn more and more profit and these profit can be known only after knowing explicit cost and implicit cost.