Explicit Cost
Explicit Cost
Explicit cost is the cost that is paid directly for the acquisition of an asset or the incurrence of a liability. It is the cost that is spent to acquire an asset or incur a liability in the course of business operations.
Examples of Explicit Costs:
- Purchase price of equipment
- Cost of materials used in production
- Rent paid for office space
- Interest paid on loans
- Utilities bills
Types of Explicit Costs:
- Direct costs: Costs that are directly related to the production or sale of a product, such as raw materials, direct labor, and factory overhead.
- Indirect costs: Costs that are not directly related to the production or sale of a product, such as depreciation, interest expense, and depreciation.
Treatment of Explicit Costs:
Explicit costs are generally recorded as expenses in the period they are incurred. They are not capitalized to the asset or liability account.
Example:
A company purchases a machine for $10,000. The cost of the machine is expensed in the period it is purchased.
Formula for Explicit Cost:
Explicit Cost = Amount paid for asset or liability
Additional Notes:
- Explicit costs are also known as out-of-pocket expenses.
- Explicit costs are used in calculating the cost of goods sold and the cost of services rendered.
- Explicit costs are a key component of financial statements.