What Is The Difference Between Implicit Cost And Implicit Costs

Good Essays
Explain the difference between implicit and explicit costs. Give two examples of when an explicit cost is different from an implicit cost.

Taylor (2014) defines explicit cost as “payments that are actually made” by a business, these could be “wages that a firm pays its employees or rent that a firm pays for its office” (p. 159). Implicit costs are less obvious than explicit costs. Implicit costs are costs that have occurred but are not initially reported as costs, such as the opportunity cost of a firm using its own resources (Averkamp, n.d.).

Therefore, explicit and implicit costs differ. For example, if I were to open up my own restaurant. The explicit costs would be the rent, set-up cost, supplies, wages etc. The implicit costs could be the wages and benefits (company car, health insurance etc.) that I am giving up in my current job in order to open the restaurant. If I gave up a $80 000 salary and a $50 000 company car to start the restaurant, I would need to factor in at least $130 000 in implicit costs. These would not be as obvious as the explicit costs but must be counted nonetheless.

In your own words, explain the difference between accounting and economic profit. Give two examples of when they differ.

The concept of accounting profit is cash related, in other words, the amount of money made minus the amount of money spent. It is calculated by subtracting explicit costs from the firm’s total revenue, additionally, tax is calculated based on accounting profit
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