A Business Encyclopedia

Implicit Cost

Definition: The Implicit Cost, also called as Imputed Cost is the implied cost that does not take a form of cash outlay, and neither is recorded in the books of accounts.

The opportunity cost is the important example of implicit cost wherein the expected returns from the second best alternative action is foregone while pursuing a certain action. The implicit or imputed cost can be termed as a cost which results from using the asset for one’s own use rather than renting or selling it, or the income is foregone of not choosing to work.

The concept of Implicit cost can be further comprehended by an example given below:

Suppose, a teacher decides not to utilize his services in any education institute rather become a home tutor. After some time he decides to join any education institute then he forgoes his salary as a home tutor. This loss of salary is the opportunity cost of income from the education institute, and hence, this is the implicit cost of the education institute.

Another example of implicit cost is, if the person decides to live in his own house, then he loses the opportunity to gain rent by renting it to others. This cost is the implicit cost.

The imputed cost is not taken into account while computing the gain or loss of the firm, but however, is important to decide whether or not to continue with the factor in its present use. The implicit cost is used to calculate the economic profit. The economic profit is the difference between the total revenue generated minus total cost (both explicit and implicit). Since the economic profit includes the implied cost, it is lower than the accounting profit.

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