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.
FAQs
What is explicit cost with an example?
An explicit cost is a direct, out-of-pocket expense a business incurs. For example, paying salaries to employees or rent for office space are explicit costs.
What falls under explicit costs?
Explicit costs include rent, wages, utility bills, materials, and any other direct payments made by a business.
Is advertising an explicit cost?
Yes, advertising is considered an explicit cost since it involves a direct payment for marketing services.
What is imputed and explicit cost?
Imputed cost (or implicit cost) refers to the opportunity cost of using resources that could have been employed elsewhere, while explicit costs are actual out-of-pocket expenses.
