what is explicit cost 
explicit costs are normal business costs that appear in a company s general ledger and directly affect its profitability they have clearly defined dollar amounts that flow through to the income statement examples of explicit costs include wages lease payments utilities raw materials and other direct costs 1understanding explicit costsexplicit costs also known as accounting costs are easy to identify and link to a company s business activities to which the expenses are attributed they are recorded in a company s general ledger and flow through to the expenses listed on the income statement the net income ni of a business reflects the residual income that remains after all explicit costs have been paid 1explicit costs are the only accounting costs that are necessary to calculate a profit as they have a clear impact on a company s bottom line the explicit cost metric is especially helpful for companies long term strategic planning 1michela buttignol investopediaexplicit costs vs implicit costsexplicit costs involve tangible assets and monetary transactions and result in real business opportunities explicit costs are easy to identify record and audit because of their paper trail expenses relating to advertising supplies utilities inventory and purchased equipment are examples of explicit costs although the depreciation of an asset is not an activity that can be tangibly traced depreciation expense is an explicit cost because it relates to the cost of the underlying asset owned by the company 1in contrast implicit costs are not clearly defined identified or reported as expenses they often deal with intangibles and are described as opportunity costs the value of the best alternative not accepted an example of an implicit cost is time spent on one activity of a business that could better be spent on a different pursuit management will utilize explicit costs when reviewing a business operations including profits but will calculate implicit costs only for decision making or choosing among a variety of alternatives 1an explicit cost is a defined dollar amount that appears in the general ledger while an implicit cost is not initially shown or reported as a separate cost companies use both explicit and implicit costs when calculating a company s economic profit which is defined as the total return a company receives based on all costs incurred to attain that revenue as opposed to accounting profit which is the amount of money left over after costs and expenses are deducted from total revenue specifically economic profit shows whether a company is earning more than the competitive norm 2 it can be used to determine if a business should enter or exit a market or an industry in a perfectly competitive market economic profit is zero 