Implicit Cost: Definition, Examples, Application & Calculation

Implicit Costs – Maybe there are some of you who don’t understand clearly what implicit costs mean. Implicit cost as a type of opportunity cost used in the company’s internal resources where this type of cost is then not displayed in the financial statements. Check out the explanation of what implicit costs are for a company and the calculation steps:

Definition of Implicit Cost

Implicit cost or implicit cost as a type of opportunity cost used in the company’s internal resources where this type of cost will not be displayed in the financial statements or reported in a separate cost. Opportunity costs arise when a company uses internal resources in a project or operational activity without explicit compensation for using these resources.

This type of cost itself is generally very difficult to calculate because in calculating this type of implicit cost there is no physical or cash exchange in its activities. If the company then decides to use the resources, there will be a potential loss of the ability to obtain new funds or profits from various other activities on the resources they have.

In simple terms there is no cash exchange if the assets are used for operational needs. But in short, this type of implicit cost then comes from using the assets, not from renting or buying. In addition, this type of implicit cost or implicit cost also shows a loss of potential income, but opens up profit opportunities.

This fee can also be an amount of money that is potentially lost by choosing to use internal resources rather than receiving payments from third parties for the use of these resources. For example, implicit costs in a company then earn income by utilizing business buildings and producing and selling products, compared to obtaining income from renting out the building.

Examples and How to Calculate Implicit Costs

Implicit costs also play an important role when it comes to determining the economic profit earned by a business. Economic profit itself is determined as the difference between the total revenue derived from the business and the sum of its implicit and explicit costs.

Explicit costs are also reported on a business’ income statement because a business, however, must determine implicit costs by utilizing scenarios as well as a comparative analysis of available options. Because of this, economists carefully observe the implicit costs associated with business, and generally construct them as part of economic analysis.

It can be concluded that implicit cost is a very important cost both for business operations and for economists in analyzing the nation’s economy. Implicit costs to the company itself depend on the type of company assets associated. But in general, implicit costs are opportunities or costs that are not chosen by a company. Examples of implicit costs for the company itself can be seen in the list below:

1. Employee Training Time

The time spent on production activities so that the implicit opportunity cost of training employees can then be estimated by the amount of output lost during the training period.

2. Machine Repair

The machine repair period when it finally reaches a certain time will also be the same as the duration of the machine in producing output, so it is like an implicit cost for the company. For example, the time for repairing a machine is 3 hours and every hour the machine can then produce 100 units of output, then in repairing a machine, the implicit cost is 100 units x 3 hours = 300 units of output.

3. Sending Employees to Continuing Studies

The same with providing training to employees i.e. giving him time to get an education as well as reduced output over a period of time. But that doesn’t mean that it shouldn’t be done. Companies can do these things as long as the implicit costs do not exceed the estimated profit earned by the company.

4. Business Owners Who Manage Their Own Companies

When a new company is built, the owner may not have pocketed enough capital to employ his employees, so he does some of the tasks in it alone. Then the implicit cost is also an opportunity for the owner of the company to hire a more qualified workforce. Because by doing all the tasks yourself, the work will take longer to complete and will be ineffective. This is a cost or opportunity that the owner then passes up when choosing not to hire someone else.

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The Difference between Explicit and Implicit Costs

If the example of implicit costs is the potential loss of income due to the use of company assets, know the difference between them and explicit costs. The definition of explicit costs itself is all types of costs that are budgeted in the production process. Thus, the difference between explicit and implicit costs can be seen in terms of the money actually allocated. The definition of explicit costs can also include costs such as employee salaries, rental expenses and capital repair costs, and others.

Implicit and explicit costs are also two types of company expenses, although there are some differences in their application. In addition to financial reports, records, differences in explicit and implicit costs can also be seen from how companies use them. Implicit costs are a material consideration for deciding and utilizing company assets, while explicit costs are costs that come out and affect various production processes directly.

Basically, in business accounting, when there are explicit costs, there will also be implicit costs. After knowing and understanding explicit costs know what is the difference between implicit and explicit costs.

Thus, as a business owner, you will also be good at sorting out which costs can be categorized as explicit costs and which are included in implicit costs. In short, explicit costs are costs that are certain or real and are directly related to assets or assets, and are in the form of financial transactions, so that they finally provide real business opportunities for the company.

Explicit expenses are also easy to identify, record and audit. Unlike the case with implicit costs. Forms are difficult to identify, even to report in terms of costs. This is because, implicit costs are directly related to intangible things, or commonly described as opportunity costs.

One easy-to-understand example of implicit cost is the time spent doing a business activity, usually this time can then be used in carrying out a different business approach.

Implementation of Implicit Cost Calculation

First Example

If a manufacturing company with its own building uses various operational activities and business production in it. Then, this company then prefers to use the building as a company operational activity rather than renting out the building to other parties.

This company can then generate a net profit of IDR 600 million per month, while if the building is leased to another party, the opportunity cost that will be obtained is IDR 40 million per month. The way to calculate this implicit cost itself is very easy, as it is known before that there has been an actual economic profit from a manufacturing company of IDR 600 million, then we can subtract IDR 40 million. That is, the implicit cost of this manufacturing company is 560 million rupiah per month.

Because manufacturing companies utilize their own resources in the form of buildings, these companies do not derive income from assets and will not report it as explicit or to use the building for operational activities. For this reason, the company must also be willing to lose its potential income of IDR 40 million. This is what we usually call the implicit cost.

Second Example

Say there is someone who wants to allocate Rp. 150 million of money that can be used to start a new business. Then, this money is then allocated and has the potential to earn deposit interest income of IDR 10 million in one year if you keep it as a deposit at a bank. So, this Rp. 10 million is what is then commonly referred to as the implicit cost.

Other Things to Look For

The management of a company really needs to make careful calculations when determining production costs, both in terms of explicit and implicit costs. Therefore there are several important things that cannot be overlooked in calculating production costs so that the company is then still able to obtain maximum profit. Here are some things to watch for about implicit costs. What are they? Check these out:

  • Distinguish between surcharges and margin costs. Margin costs themselves are changes in fixed costs in a unit of output changes, while additional costs are changes in the total cost of applying certain managerial decisions.
  • Enter the opportunity cost across all inputs, whether owned or purchased by the company. This is then done because the company will not be able to hold the leased inputs. If a payment value is then lower than the price paid by other companies.
  • Do not ignore the existence of accounting costs because it is very necessary in the company’s financial reports and taxes.
  • Include alternative costs or opportunity costs on all inputs, whether owned or purchased by a company. The reasons include the company will not be able to retain the inputs that are leased if these inputs are paid for at a price lower than the price paid by other companies.
  • Accounting or historical costs themselves are very important for a company’s financial statements as well as taxes. When a managerial decision-making objective occurs, then the economic cost or opportunity cost will then be considered as a relevant cost concept that should be used by companies.
  • In discussing product costs, there are marginal costs and additional costs that must be distinguished. Marginal Cost as a fixed cost change in a unit of output change, for example in the total force is $ 140 to be able to produce 10 units of output and $ 150 to produce 11 units of output, then the marginal cost of the company in the 11th unit is $ 10.
  • Additional costs on the other hand are a broader concept and refer to changes in the total cost of implementing certain managerial decisions, such as introducing a new product, carrying out a certain advertising campaign, or producing components that they previously purchased themselves.
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Implicit costs are a cost component that is not easy to measure and assess objectively. However, based on the examples above, the implicit costs which are then able to provide distinct advantages over company resources are perhaps often overlooked.

However, on the other hand, such as the implicit costs above, it also shows that these opportunity costs have the potential to provide even better benefits. Therefore, every management must be able to make very careful calculations so that the company can obtain maximum profitability and profits.

Books Regarding Implicit Costs

1. Cost Analysis and Estimation

This book is the work of Didi Asmadi, Sri Rahmawati, containing In this book, the discussion material is arranged systematically in seven chapters, accompanied by case studies and practice questions. This Textbook of Cost Analysis and Estimation presents various examples of cases that were solved using various managerial accounting approaches and adds practice questions that are expected to improve students’ understanding and ability in the Cost Analysis and Estimation course. The presence of this textbook is expected to be able to contribute knowledge and learning for academics in achieving learning objectives in accordance with predetermined instructions.

2. Cost Accounting Accountant

Book by Drs. Harnanto, M. Soc. Sc., Is a textbook that is simple, concise, yet fully discloses the collection of production cost data and the determination of the cost of products based on the historical cost system; which is absolutely necessary to be used as a basis for evaluating inventory of products in process and finished products in accordance with standards or Generally Accepted Accounting Principles (PABU) at manufacturing company lines.

This book is written using jargon and a straightforward style, so that ordinary people can easily understand its contents. This book explains everything related to measurement, systems and procedures for collecting and recording production cost data and determining or calculating the cost of products based on a historical cost system. The discussion in this book covers the collection of data on material costs, labor costs, and factory overhead costs; both according to the cost of orders method and the cost of processes in the historical cost system, including the various issues that surround it such as: damaged products, defective products and leftover materials.

This book also provides realistic case examples that are easy to understand. With content or discussion material that is quite comprehensive, it is no doubt that this book is very useful for practitioners (public accountants, management accountants, production managers, financial managers), and students of diploma programs, undergraduate programs taking accounting courses in particular .

3. Accurate Costing with Microsoft Excel

Are you confused about how to calculate the cost of goods sold? Starting from allocating the costs one by one and then putting them into cost items. It’s really hard huh? Now you don’t have to worry anymore! This book will answer all your questions starting from: What is cost, Easy cost allocation with excel, Calculation of depreciation and allocation to cost of goods sold.

Integrating all costs into cost of goods sold You will also get information about real costing calculations that can be applied immediately. Everything is done with the help of Microsoft Excel which makes your work easier and can produce accurate, fast and precise costing.