Implicit Cost Definition
An implicit cost is a non-monetary opportunity cost that occurs when a business utilizes an asset it already owns rather than renting or buying. These costs are also known as notional, implied, or imputed costs, and they differ from explicit costs, which are direct monetary expenses.
Understanding Implicit Costs
Implicit costs, also known as implied, imputed, or notional costs, don't involve cash transactions, so they don't appear in a business's accounting records. These costs represent the potential revenue a business misses out on by using its resources instead of renting or selling them.
These costs can be considered as part of a business's total expenses since they represent potential income sources. When calculating total economic profit, both implicit and regular costs are taken into account. Thus, economic profit is the difference between a business's revenue and the total of its operational costs and opportunity costs.