What is the implicit cost?

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The cost that has been incurred but not seen or documented as a separate expense is considered an implicit cost. An opportunity cost emerges when a firm allocates internal resources to a project without receiving any explicit reward. Implied, imputed, and notional costs are used to describe implicit costs. It isn’t easy to put a figure on these costs. Since money doesn’t change hands, firms do not have to document implicit costs for accounting purposes.

These costs indicate a potential income loss, but not profits. Implicit costs are a form of opportunity cost, which would be the advantage that a firm foregoes by taking one option over another. The implicit cost may be the amount of money a firm loses by using internal resources rather than paying for a third party to use such resources.

Since implicit costs indicate potential income sources, a firm may add them as part of the cost of doing business. When estimating total economic profit, economists consider both implicit and explicit costs of doing business. To put it another way, economic profit is a company’s revenue minus its operating costs and any opportunity costs.

At least two situations should be run to determine implicit costs. The business will probably lose out on an opportunity to generate economic profits if one scenario produces more profit and increases earnings than the existing scenario. 

To evaluate the implicit costs, the firm must conduct scenario analysis/comprehensive comparative analysis to determine the total effect of not going among some of the available scenarios based on only one particular chosen scenario. Because implicit costs are intangible, there is no defined mathematical relationship/formula for calculating them.

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Pieter Borremans
By Pieter Borremans

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