Understanding Explicit Costs
Explicit costs refer to easily identifiable and recordable business expenses. They show up on a company's financial statements, hence they are also known as accounting costs. They are different from implicit costs and involve money transactions such as employee salaries.
Elaboration on Explicit Costs
Explicit costs are a company's financial obligations for its operations. They are the recorded expenses in its financial statements covering all direct and indirect costs of running a business. An explicit cost needs to have a cash outflow, be a tangible cost, and appear in the company’s financial statements.
For example, an advertisement cost in a magazine is an explicit cost as it involves a cash transaction and is recorded in the company's financial records. However, an intangible cost like employee training is not an explicit cost as there is no cash outflow.
Examples of Explicit Costs
Explicit costs are typical business expenses recorded in the financial statements. They are easy to measure and record and include all cash outflows for business operations like:
- Employee remuneration such as salaries, wages, bonuses, commissions, and benefits
- Production material costs
- Marketing and advertising expenses
- Costs for renting or owning and maintaining facilities and equipment
- Utility costs such as electricity, water, gas, and internet
- Overhead expenses such as taxes, insurance, legal fees
- Depreciation of assets (although it doesn’t involve cash payment, it reflects the loss of value of an owned asset)