Sunday, June 10, 2012

Explicit or Implicit Cost Example

Example to distinguish an explicit or implicit cost.

A company pays its lawyers an annual retainer of $100,000.  Is this considered an explicit or implicit cost?

Explicit costs are actual outlays of cash by a company.  These costs generally include all costs that involve a financial transaction between two different parties.

On the other hand,  an implicit cost is an economic cost that does not necessarily involve a financial transaction, but still involves the use of company's limited resources. .

To reference the previous question, when a company pays an annual retainer of $100,000, there is a financial transaction between two parties because the lawyer is trading their time for money.

Therefore, an annual retainer for a lawyer in is an explicit accounting cost.

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