What is Explicit Cost?

Explicit costs are those costs recorded in the accounting records of a business. As such, they have a distinct paper trail that is easy to identify and record. The profitability of a business is determined after all explicit costs have been subtracted from revenues. Explicit costs are included in the formulation of a firm’s annual budget, on the assumption that they will be incurred again in the future.

Presentation of Explicit Costs

Most explicit costs are period costs, and so will flow through the income statement. Other costs may not be consumed at once, and so will be presented in a firm’s balance sheet until they are consumed. For example, the cost to acquire merchandise may be capitalized into the inventory line item that appears on the balance sheet, and will later be charged to expense when the merchandise is sold.

Related AccountingTools Course

Cost Accounting Fundamentals

Examples of Explicit Costs

Examples of explicit costs are the cost of goods sold, compensation expense, rent expense, and utilities expense. Depreciation expense is also considered an explicit cost, since it relates to the ongoing cost of a set of fixed assets.

Explicit Costs vs. Implicit Costs

Implicit costs are not clearly defined, and so are not included in a company’s accounting records. They are considered to be more of an opportunity cost, which is the value of an activity that was not pursued. For example, the time spent developing a new product could have been spent revising the design of an existing one.

Explicit costs are included in the calculation of a firm’s profitability, while implicit costs are only considered as part of a decision-making process, when management is choosing between alternative actions.