# Implicit Cost: Definition, How It Works, and Examples

> **Definition**
>
> An implicit cost is the financial gain passed up when a firm uses its assets.

## What Is an Implicit Cost?

An implicit cost is a cost that involves no exchange of money and is not necessarily shown or reported as a separate expense.

It represents an [opportunity cost](https://www.investopedia.com/terms/o/opportunitycost.asp) that arises when a company itself uses assets it owns for some purpose. There's no explicit compensation for the utilization of those assets. So, there's no exchange of cash or added revenue.

This means the company forgoes the chance to earn money from the use of its resources by others.

Put simply, an implicit cost involves using an asset rather than [renting](https://www.investopedia.com/financial-edge/1112/reasons-renting-is-better-than-buying.aspx) or selling it.

### Key Takeaways

*   Implicit costs represent a loss of income but do not represent a loss of profit.
*   These costs contrast with explicit costs, which represent expenses paid by a company in the course of business.
*   An example of an implicit cost is a small business owner who forgoes a salary in the early stages of their company's operations to increase revenue.

![Implicit Cost](https://www.investopedia.com/thmb/Aas8KAaEYmwBMk9lMjTYeVdGYIM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Implicitcost-blue-df62d5d36fdd4f09a544609863ec6234.jpg)

*Implicit costs have no impact on taxes but can affect economic profit. — Investopedia / Michela Buttignol*

## Understanding Implicit Costs

Implicit costs are also referred to as imputed, implied, or notional costs. These costs aren't easy to quantify. And businesses don’t necessarily record them for accounting purposes as money does not change hands.

These costs represent a loss of potential income, but not of profits. As mentioned, implicit costs are a type of opportunity cost, which is the benefit that a company passes up by choosing one option over another.

An implicit cost could be the revenue that a company misses out on because it chooses to use an internal resource rather than get paid by a third party for its use of it.

For example, a company could earn income by renting out its building. However, it instead decides to use the building to manufacture and sell its products.

A company may choose to include implicit costs in its cost of doing business since they represent possible sources of income.

Economists include both implicit costs and actual, regular costs of doing business (explicit costs) when calculating total economic profit.

In other words, [economic profit](https://www.investopedia.com/terms/e/economicprofit.asp) is the revenue a company generates minus business expenses and any opportunity costs.

> **Important**
>
> In corporate finance decisions, implicit costs should always be considered when deciding how to allocate company resources.

## Implicit Costs vs. Explicit Costs

Implicit costs are technically not incurred and cannot be measured accurately for accounting purposes.

There is no cash outflow with implicit costs. But they are an important consideration because knowing them can help managers make effective decisions for the company.

In contrast, [explicit costs](https://www.investopedia.com/terms/e/explicitcost.asp), which are the other broad category of business expenses, represent actual payments of cash made by a company for the company's operations.

Rent, salary, and other operating expenses are explicit costs. They are all recorded and appear on a company's financial statements.

The main difference between the two types of costs is that implicit costs are opportunity costs, while explicit costs are expenses paid with a company's own tangible assets (e.g. cash).

This makes implicit costs synonymous with imputed costs, while explicit costs are considered out-of-pocket expenses.

Implicit costs and explicit costs are used when calculating economic profit, while only explicit costs are used when calculating [accounting profit](https://www.investopedia.com/terms/a/accountingprofit.asp).

## Examples of Implicit Costs

Examples of implicit costs include the loss of interest income on funds and the depreciation of machinery for a [capital project](https://www.investopedia.com/terms/c/capital-project.asp).

They may also be intangible costs that are not easily accounted for, such as when an owner allocates unpaid time for the maintenance of a company, rather than getting paid for using those hours elsewhere.

When a company hires a new employee, there are implicit costs involved in training that employee. If a manager allocates eight hours of an existing employee's day to teach this new team member, the implicit cost would be the existing employee's hourly wage, multiplied by eight.

It's implicit because the existing employee would normally have been working in their regular role, and contributing to revenue earned.

Another example of an implicit cost involves [small business owners](https://www.investopedia.com/articles/financialcareers/08/business-owner-relationships.asp) who may decide to pass on taking a [salary](https://www.investopedia.com/articles/personal-finance/031115/salary-vs-hourly-how-benefits-laws-differ.asp) in the early stages of a company's existence to reduce costs and increase revenue.

They provide the business with their skill in lieu of a salary, which becomes an implicit cost.

## Are Implicit Costs Always Bad?

No, they're not. In fact, the implicit cost of using an existing asset may well be less than the actual (explicit) cost of paying for the resources needed if it didn't use what it already owned.

## What Are Examples of Explicit Costs?

Explicit costs are specific costs that are part of the normal course of operations and are directly linked to a firm's profitability. Examples include wages, utilities, advertising, raw materials, and rent.

## Is Labor an Implicit Cost?

Labor can technically be an implicit and explicit cost. When wages and salaries are paid to employees, labor is an explicit cost to a business. When wages or salaries are foregone, which can happen when an entrepreneur starts their own business, labor would be an implicit cost.

## The Bottom Line

Implicit costs are opportunity costs and are not usually recorded for accounting purposes. Though implicit costs represent a loss of income, they do not necessarily represent a loss of profit, because their value is being utilized for the benefit of the business.

Though they are harder to quantify and are often subjective, implicit costs can play a key role in the success of a business.