What is the explicit costs?
Explicit costs are the costs of running a business that can be easily measured and recorded. These costs are also known as accounting costs because they appear on the company's financial statements – such as its income statement and balance sheet.
The term explicit costs is used to contrast them with implicit costs. Explicit costs always involve a monetary transaction – for example, salaries paid to workers.
Explicit Costs Explained
Explicit costs are a company's payments to others for its business activities. They are the expenses a company incurs and reports in its financial statements. They include all the direct and indirect costs spent on running a business. For an expense to be an explicit cost, it must meet three criteria:
-
The expense must involve a cash outflow;
-
The expense must be a tangible cost;
-
The expense must appear on the company’s financial statements.
For instance, when a company pays for an advertisement in a magazine, it transfers cash to the magazine publisher. This transaction is an explicit cost that is recorded in the company’s income statement and general ledger. Therefore, advertisement costs are explicit costs. However, when managers spend time on training employees, the cost is intangible—there is no cash outflow. Therefore, training is not an explicit cost.
Explicit costs Examples
Explicit costs are the normal business expenses that a company incurs and reports on its financial statements. They are also known as accounting costs because they are easy to measure and record. Explicit costs include all the cash outflows that a company makes to operate its business, such as:
-
Compensation for employees, including salaries, wages, bonuses, commissions, and benefits
-
Costs of materials that a company needs to produce its goods or services
-
Costs of marketing and advertising to promote its brand and products
-
Costs of renting or owning and maintaining its facilities and equipment
-
Costs of utilities, such as electricity, water, gas, and internet
-
Costs of taxes, insurance, legal fees, and other overhead expenses
-
Depreciation of its assets over time (even though depreciation does not involve a cash payment, it is still an explicit cost because it reflects the loss of value of an asset that the company owns)