Maybe there are some of you who don’t understand clearly what is meant by implicit costs. Implicit costs are a type of opportunity cost used in the company’s internal resources where this type of cost is not then shown in the financial statements. See the explanation of what implicit costs are for a company and the calculation steps:
Understanding Implicit Costs
Implicit costs or implicit costs are a type of opportunity cost used in the company’s internal resources where this type of cost will not then be shown in the financial statements or be reported as a separate cost. Opportunity costs themselves arise if a company uses internal resources in a project or operational activity without explicit compensation for the use of these resources.
This type of cost itself is generally very difficult to calculate because in calculating this type of implicit cost there is no physical exchange or cash in the activity. If the company then decides on the use of resources, there will be the potential to lose the ability to obtain new funds or profits from various other activities using the resources it has.
In simple terms there is no cash exchange if assets are used for operational needs. But in short, this type of implicit cost then comes from using the assets, rather than from renting or buying. Apart from that, this type of implicit cost also shows a loss of potential income, but opens up opportunities for profit.
This cost can also be the amount of money that is potentially lost due to choosing to use internal resources rather than receiving payment from third parties for the use of those resources. An example of implicit costs is that a company then earns income by utilizing the business building and producing and selling products, compared to earning income from renting out the building.
Examples and How to Calculate Implicit Costs
Implicit costs also play an important role when it comes to determining the economic profits earned by a business. Economic profit itself is determined as the difference between the total income obtained from a business and the sum of its implicit and explicit costs.
Explicit costs are also reported on a business’s income statement because the business, however, must determine implicit costs by utilizing scenarios and comparative analysis of available options. Therefore, economists carefully observe the implicit costs associated with business, and generally form them as part of economic analysis.
It can be concluded that implicit costs are costs that are very important both for business operations and for economists in analyzing the nation’s economy. Implicit costs for the company itself depend on the type of assets of the company concerned. However, in general, implicit costs are opportunities or costs that a company does not choose. Examples of implicit costs for the company itself can be seen in the list below:
1. Employee Training Time
The time spent on production activities and thus the implicit opportunity cost of employee training can then be estimated by the amount of output lost during the training period.
2. Machine Repair
The machine repair period when it finally reaches a certain time will also be the same as the duration of the machine in producing output, so it is like an implicit cost for the company. For example, the time to repair a machine is 3 hours and each hour the machine can then produce 100 units of output, so in repairing a machine, the implicit costs are 100 units x 3 hours = 300 units of output.
3. Send employees to continue their studies
It is the same as providing training to employees, namely giving them time to receive education, as well as reducing output over a period of time. But that doesn’t mean that this shouldn’t be done. Companies can do these things as long as the implicit costs do not exceed the estimated profits obtained by the company.
4. Business Owners Who Manage Their Own Companies
When a new company is built, the owner may not have enough capital to hire employees, so he does some of the work alone. So implicit costs are also an opportunity for company owners to employ more qualified workers. Because by doing all the tasks yourself, the work will take longer to complete and will be ineffective. These are costs or opportunities that the owner then misses when choosing not to hire anyone else.
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Difference between Explicit and Implicit Costs
If an example of an implicit cost is potential revenue lost due to the use of company assets, know the difference from an explicit cost. The definition of explicit costs is all types of costs that are budgeted in the production process. So, the difference between explicit and implicit costs can be seen in terms of the money actually allocated. The definition of explicit costs can also include costs such as employee salaries, rental expenses and capital repair costs, etc.
Implicit and explicit costs are also two types of company expenses, although in their application there are several differences. Apart from financial reports and recording, the difference between explicit and implicit costs can also be seen from how the company uses them. Implicit costs are considerations for deciding and utilizing company assets, while explicit costs are costs that come out and directly influence various production processes.
Basically, in business accounting, when there are explicit costs, there will also be implicit costs. After knowing and understanding explicit costs, know the difference between implicit and explicit costs.
In this way, as a business owner, you will also be good at sorting out which costs can be categorized as explicit costs and which ones are included in implicit costs. In short, explicit costs are costs that are certain or real and are directly related to assets or assets, and take the form of financial transactions, so that they ultimately provide real business opportunities for the company.
Explicit cost types are also easy to identify, record and audit. This is different from implicit costs. These forms are difficult to identify, even to report as costs. This is because implicit costs are directly related to intangible things, or are usually described as opportunity costs.
One example that is easy to understand of implicit costs includes time spent carrying out a business activity, usually this time can then be used to carry out a different business approach.
Application of Implicit Costing
First Example
If a manufacturing company with its own building uses various operational and business production activities within it. Then, this company then preferred to use its building for company operations rather than renting the building to other parties.
This company can then generate a net profit of IDR 600 million per month, while if the building is rented to another party, the opportunity cost will be IDR 40 million per month. The way to calculate implicit costs itself is very easy, as is known before there is an actual economic profit from the manufacturing company of IDR 600 million, then we can subtract 40 million rupiah. This means that the implicit costs of this manufacturing company are 560 million rupiah per month.
Because manufacturing companies utilize their own resources in the form of buildings, these companies do not derive income from assets and will not report it as explicit or for using the building for operational activities. For this reason, the company must also be willing to lose its potential income of IDR 40 million. This is what we usually call implicit costs.
Second Example
Let’s say there is someone who wants to allocate IDR 150 million which can be used to start a new business. Then, this money is then allocated and has the potential to earn deposit interest income of IDR 10 million in one year if you save it as a deposit at a bank. So, this Rp. 10 million is what is usually referred to as implicit costs.
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Other Things to Pay Attention to
The management of a company really needs to make careful calculations when determining production costs, both in terms of explicit and implicit costs. Therefore, there are several important things that must not be overlooked in calculating production costs so that the company is still able to obtain maximum profits. Here are some things to pay attention to regarding implicit costs. What are they? Check these out:
- Distinguish between additional costs and margin costs. Margin costs themselves are changes in fixed costs in a unit change in output, while additional costs are changes in the total costs of applying certain managerial decisions.
- Include opportunity costs across all inputs, whether the company owns or purchases them. This is then done because the company will not be able to retain the rented inputs. If a payment value is then lower than the price paid by other companies.
- Don’t ignore accounting costs because they are very necessary in company financial reports and taxes.
- Including alternative costs or opportunity costs for all inputs, whether owned or purchased by a company. The reasons include that the company will not be able to retain the input it rents if this input is paid at a lower price than the price paid by other companies.
- Accounting or historical costs themselves are very important for company financial reports and taxes. When a managerial decision-making objective occurs, economic costs or opportunity costs will then be considered as relevant cost concepts that must be used by the company.
- When discussing product costs, there are marginal costs and additional costs that must be distinguished. Marginal Costs are changes in fixed costs in a unit change in output, for example if the total force is $140 to be able to produce 10 units of output and $150 to produce 11 units of output, then the marginal cost of the company on the 11th unit is $10.
- Incremental costs on the other hand are a broader concept and refer to changes in the total costs of implementing a particular managerial decision, such as introducing a new product, carrying out a particular advertising campaign, or producing components they previously purchased themselves.
Implicit costs are a cost component that is not easy to measure and assess objectively. However, based on the examples above, implicit costs can then provide distinct benefits for company resources that are perhaps often overlooked.
However, on the other hand, as in the implicit costs above, it also shows that these opportunity costs have the potential to provide even better profits. Therefore, every management must be able to make very careful calculations so that the company can obtain maximum profitability and profits.
2. Cost Accounting Accountant
The book by Drs. Harnanto, M. Soc. Sc., is a simple, concise, but comprehensive textbook about collecting production cost data and determining product cost prices based on a historical cost system; which is absolutely necessary to be used as a basis for assessing the inventory of products in process and finished products in accordance with standards or Generally Accepted Accounting Principles (PABU) in every manufacturing company.
This book is written using jargon and a straightforward style, so that even lay people can easily understand the contents. This book explains everything related to measurements, systems and procedures for collecting and recording production cost data and determining or calculating the cost of products based on a historical cost system. The discussion in this book includes data collection on material costs, labor costs, and factory overhead costs; both according to the order cost method and process cost method in the historical cost system, including various surrounding problems such as: damaged products, defective products and remaining materials.
This book also provides realistic case examples so that they are easy to understand. With quite comprehensive content or discussion material, this book is undoubtedly very useful for practitioners (public accountants, management accountants, production managers, financial managers), and students of diploma programs, undergraduate programs taking accounting study programs in particular .
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3. Accurate Costing with Microsoft Excel
Are you confused about how to calculate the cost of goods sold? Starting from allocating the costs one by one then putting them into cost items. Very difficult, right? Now you don’t need to worry anymore! This book will answer all your questions starting from: What are costs, Allocation of costs using Excel easily, Calculation of depreciation and allocation to cost of goods sold.
Integrating all costs into the cost of goods sold. You will also get information regarding real cost calculations that can be applied immediately. All of this is done with the help of Microsoft Excel which makes your work easier and can produce accurate, fast and precise costing.