Cost and Production: Explicit and Implicit Costs

Global monetary fund classifies payments either as explicit or implicit costs based on the transaction incurred. Explicit cost can be described as a cost organization tend to commit during the production process, while implicit cost is not committed to production or involving cash payment by the organization. Explicit costs involve payments for both wages and salaries to employees, payment for rent or material acquisition (Gillan, Hartzell, and Robert). With implicit cost, the opportunity cost of the resources is involved, e.g., the operation activities that involves factory expansion within the land that is already owned (Thomas and Maurice). The preceding discussion presents information on differences between explicit and implicit costs. All the four differences below are from the journal article, “Difference Between Explicit Cost and Implicit Cost” by Surbhi.

First, organizations incur explicit costs when conspiring to pay for utilizing factors of production by an entity whereas implicit expenses remain as opportunity costs in using the wonders resources including things like organization’s land for expansion and capital inventory.

Secondly, most organization tend to report the explicit cost to management since it affects the organization’s financial status since it will require expenditure to mend any anomalies incurred within the organization. On the other hand, implicit costs are neither recorded or reported to the organization’s management body. They tend not to affect the inventory of the company since the resources already belong to the organization.

Third, explicit costs play a significant role in determining economic and accounting profits, unlike the implicit costs which do the task of determining the economic profit only. According to economists, the second profit calculated is termed as the economic profit of the organization.

Fourth, since the explicit cost is incurred, its measurement becomes automatically objective. Since the implicit costs are normally incurred indirectly within the organization, their measurements remain subjective. For that reason, explicit costs tend to be easily ascertained, unlike implicit costs that do not have any paper trail.

Having analyzed the existing differences between the explicit and implicit costs, the preceding discussion shall focus on how both costs relate to economic and account profits.

Accounting profits are always determined based on certified accounting principles to access the company’s total revenue reduced by the explicit costs incurred. Also, accounting profit can be described as the difference between total revenue and total cost, i.e., total cost = explicit cost (Arnold). To determine the accounting profits, factor like time periods are considered. Accountants use accounting profits to determine the income tax, financial statements, and financial performance.

Economic