Explicit cost is the cost that is paid directly for the acquisition of an asset or the incurrence of a liability. It is the cost that is spent to acquire an asset or incur a liability in the course of business operations.

Examples of Explicit Costs:

• Purchase price of equipment
• Cost of materials used in production
• Rent paid for office space
• Interest paid on loans
• Utilities bills

Types of Explicit Costs:

• Direct costs: Costs that are directly related to the production or sale of a product, such as raw materials, direct labor, and factory overhead.
• Indirect costs: Costs that are not directly related to the production or sale of a product, such as depreciation, interest expense, and depreciation.

Treatment of Explicit Costs:

Explicit costs are generally recorded as expenses in the period they are incurred. They are not capitalized to the asset or liability account.

Example:

A company purchases a machine for $10,000. The cost of the machine is expensed in the period it is purchased.

Formula for Explicit Cost:

Explicit Cost = Amount paid for asset or liability

Additional Notes:

• Explicit costs are also known as out-of-pocket expenses.
• Explicit costs are used in calculating the cost of goods sold and the cost of services rendered.
• Explicit costs are a key component of financial statements.