written by: N Nayab•edited by: Jean Scheid•updated: 1/4/2011
Explicit costs or direct costs are costs that are clearly defined and identifiable, and involve a tangible cash outflow. Such costs usually occur when purchasing resources or to operate the concern, and have a direct impact on the bottomline. Read on for examples of explicit costs.
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Explicit costs and implicit costs rank among the major classifications of all costs. The best indicator of an explicit cost is monetary payment or money changing hands in lieu of something tangible in return, or for service, satisfaction, or to fulfill obligations.
Much of explicit cost components are of a contractual nature and recurrent. Such types of explicit costs can be a fixed amount or variable amount every period. One common example of a fixed recurrent explicit cost is rent payable to the property owner for occupying an apartment or a shop whereas, one example of a variable recurrent explicit cost are energy bills and other utility bills that depend on consumption. Another example of explicit costs are taxes. Most period costs such as marketing expenses and administrative expenses also fall in the latter category.
Some recurrent explicit costs fall in between of fixed and variable, and the most striking example of the same are employee wages. The wages usually remain a fixed sum, but the actual pay-out every month varies based on the number of days worked, loan repayments overtime, and other considerations. Another such examples of explicit costs are the cost of raw materials for manufacturing. Even though raw materials may have the same rate per unit, the actual cost incurred depends on the quantity produced.
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One-Time Explicit Costs
Most one-time explicit costs are of a capital nature. Examples of explicit costs in this category include a business investing in new machinery, costs for interior design work, and others. A company may make a one-time payment as an investment, to add value, or to meet some legal or other obligation.
Other explicit cost examples such as attorney fees may also find inclusion as one-time explicit costs even when they recur, provided such payments are on a case basis and not on a regular periodic basis.
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Not all accounting costs are explicit costs and all explicit costs are not necessarily for some tangible product or service. For example, a franchise fee, or a goodwill amount payable to the franchisor is payment for an intangible brand value and nothing else. The payment for the goods and support offered by the franchisor usually costs extra.
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Explicit costs are easy to find and account for, and as such, are also known as “accounting costs." Such cost classifications finds uses in financial statements to determine profit and loss. Comparing explicit costs vs. implicit costs, such as the value of an entrepreneur’s labor, rent of company premises, and others, are intangible opportunity costs and implicit costs do not entail any cash outflow or inflow, nor do they find inclusion in accounting statements.
A real indication of a company’s profit comes only when considering both implicit costs and explicit costs. A company showing positive cash flows, or explicit costs less than the revenue, may also show a profit in the accounting books, but the same company may actually be an unviable preposition for the entrepreneur, when considering the implicit costs of running the business.
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Byrns, Ralph. “Profit." http://www.unc.edu/depts/econ/byrns_web/Economicae/Essays/Profit.htm. Retrieved 5 November 2010
East Tennessee State University. "Explicit and Implicit Costs." http://faculty.etsu.edu/hipples/EXIMCOST.htm. Retrieved 5 November 2010.
Lipsey, Richard G. (1975). An introduction to positive economics (fourth ed.). Weidenfeld & Nicolson. pp. 214-7.