A Business Encyclopedia

Explicit Cost

Definition: The Explicit cost, also called as Actual Cost is the cost actually incurred by the firm for making all the physical payments and the contractual obligations. The physical payments include the cost of material, labor, plant, equipment, building, technology, advertisement, etc.

Thus, all the money expenses recorded in the books of accounts are, for practical purposes, the actual or explicit cost. This cost comes under the accounting cost concept, as all the physical and easily recognizable expenses incurred are recorded in the accounting books, which are then later analyzed to determine the efficiency with which the firm is operating.

For example, suppose a firm purchases machinery worth Rs 1,00,000, then the amount paid is the actual or explicit cost. The explicit or actual cost involves the direct monetary payment and is paid to the external parties to keep the in-house operations of the business in motion. The explicit cost is in the form of rent, wages, commission, salaries, etc., which are recognizable and can be easily recorded in the books of accounts. These recorded facts help in determining both the accounting and economic profit of the firm.

The accounting profit is the profit obtained by subtracting cost (explicit) from the total revenue generated. While the economic profit is the profit calculated as total revenue minus the total opportunity cost of the resources used. Since the economic profit includes the opportunity cost (implicit cost), it is lower than the accounting profit.

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