Managing a business to success is already a hard job for there are many things to be assessed and considered. One vital thing that needs to be measured is the cost of production. The cost of producing goods and services in a business is the resources a company allocates for manufacturing them. Moreover, these costs could be classified into two kinds of costs, namely: implicit costs and explicit costs.

Explicit costs are input costs that require an outlay of money by the company; accountants and economists use these costs in measuring profit. On the other hand, implicit costs are costs that do not require any outlay of money by the company; only economists use this on measuring profit. For clarity’s sake, it should be noted that these implicit costs are the opportunity costs of the input that might have been used for other purposes.

An example of this would be the capital of a starting business. Suppose that the capital used in starting a business is $300,000; if the owner has deposited this amount in an account that pays him with a 5% interest rate, the owner would have been able to earn $15,000 a year. In conclusion, this $15,000 the owner should have earned is the opportunity cost of the capital; it is also considered an implicit cost of the business.

Most of the time, these implicit costs are disregarded, however, though it is hard to assume the exact amount of these costs, it is always better that the company be aware of these costs so as to measure not only the accounting profit of the business, but also the economic profit of the business.