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.

Leave a Reply

Your email address will not be published. Required fields are marked *


Related pages

strategic human resource planning pptexamples of oligopoly market structureseasonal unemployment examplesfranchising meaningexample of skimming pricingwhat is kiosk meanwhat is an autocratic leadershipjob enrichment advantageswhat is the meaning of microfinanceforward contract definitionexamples of relatively elastic demandwhat is cobb douglas production functionnpv definedethnocentric orientation definitionschumpeter monopolyemployers provident fundoligopoly market structurescharacteristics monopolistic competitioncyclical unemployedintroduction of rural marketingcharacteristics of indifference curvewhat is moral suasiondefinition of providentsampling distribution of proportiongoing rate pricing strategytypes of income elasticity of demand with diagramscientific management theory of taylorequity theory in motivationlikert ratingcorporate raider meaninginflation definition macroeconomicsmotives for holding cashspearman's rank formulamarginal rate of substitution graphadvantages of sales forecastinginternationalisation definitionsematic meaningmeaning of stratifyhow to implement business process reengineeringblake mouton leadershipwhat is demand forecasting in managerial economicsslr definitionschumpeter theory of innovation pptnps definitionwhat is market segmentation explain with examplesunemployment defpod defadvertising elasticitydefine individual demandconcepts of collective bargainingwhat is retrenchingwhat does erg meandividend relevancediscuss scientific management theorydefine quality in tqmdeontology definition in ethicssocial lofingrensis likert four systems of managementwhat is meant by poachingipo greenshoe5forces modelsemantic barriers in communicationimplicit and explicit costreposition definitionwhat is meant by elasticity of demandmeaning of staged in hindimonetization of fiscal deficitdefine mirrdisguised definitionstrategic meaning in hindileadership grid blake and moutoncauses of cost pull inflationquotasamplingwhat is hrm planningcarrot meaningcyclical unemployment meansconcept of jitcharacteristics monopoly economicswhat is capm modelquota sampling in statisticsstrongly agree likert scale