Explicit Cost

Explicit Cost: Definition and Overview

Explicit costs are tangible, out-of-pocket business expenses that are recorded in a company’s general ledger and reflected on the income statement. They have clearly defined dollar amounts and directly reduce accounting profit. Examples include wages, rent, utilities, raw materials, advertising, and payments for purchased equipment.

Key Points

• Explicit costs are also called accounting costs because they are routinely recorded and audited.
• They appear as expenses on financial statements and directly affect net income.
• Depreciation is treated as an explicit cost even though it is a non‑cash allocation tied to an asset’s cost.
• Explicit costs are used to calculate accounting profit; economic profit requires adding implicit (opportunity) costs.

How Explicit Costs Affect Profit

• Accounting profit = Total revenue − Explicit costs.
• Economic profit = Total revenue − (Explicit costs + Implicit costs).
  Economic profit indicates whether a business is earning more than the competitive norm; in perfect competition, economic profit tends toward zero.

Examples of Explicit Costs

• Employee wages and payroll taxes
• Rent or lease payments
• Utilities (electricity, water, internet)
• Cost of goods sold (raw materials, parts)
• Advertising and marketing expenses
• Insurance and interest payments
• Depreciation and amortization (non‑cash but recorded)

Explicit Costs vs. Implicit Costs

Explicit costs
Tangible, monetary outflows with a clear paper trail.
Recorded as expenses on financial statements.
* Used for routine accounting, tax reporting, and performance measurement.

Implicit costs
Intangible opportunity costs not recorded as expenses (e.g., owner’s foregone salary, use of owned capital instead of renting it out).
Used in economic decision making to evaluate alternatives and calculate economic profit.

Why It Matters

Monitoring explicit costs is essential for pricing, budgeting, tax compliance, and short‑term profitability analysis. Including implicit costs in strategic or long‑term decisions helps determine whether resources might be better deployed elsewhere and whether a business is truly outperforming the market.

Bottom Line

Explicit costs are the documented, out‑of‑pocket expenses that determine accounting profit. Accurate tracking of these costs enables better operational decisions, clearer financial reporting, and more effective resource management.