馃攳
Implicit Cost | Definition | Accounting and Economic Profit - YouTube
Channel: WallStreetMojo
[11]
hello everyone hi welcome to the channel
of WallStreetmojo watch the video
[16]
till the end also if you are new to this
channel and you can subscribe us by
[20]
clicking the bell icon today we have a
topic which is implicit cost I mean this
[25]
kind of terms people are not very much
well versed with let's try and
[29]
understand so that you know you you have
an insight regarding this particular
[32]
term see as the name implies implicit
cost it did not represent any sort of
[36]
real expenses be very short about it it
did not represent any sort of deal
[40]
expenses but they are considered as a
form of opportunity and you know it's a
[45]
form of the opportunity cost you can say
for utilization of company's assets and
[48]
our resources in general so like for
instance you know if I come if he sets
[52]
our production plan on its own line by
implication it does not earn any
[56]
possible rent on the same property but
if if it were not to use the resources
[61]
that's the case now it must be borne in
mind that here the implicit costs do not
[65]
represent any any sort of expenses be
very sure about however the utility of
[71]
the measure lies in the fact that it
helps to evaluate if a particular
[75]
resource could have been employed at a
better or could have been employed but
[78]
let's understand the difference between
the implicit in the explicit cost see to
[81]
understand the implicit cause it would
be necessary to understand the thing
[85]
called explicit costs now what exactly
this is which this this kind of I mean
[91]
you have to you have to learn explicit
cost as well you know which are
[94]
out-of-pocket expenses and they are
incurred on the business activities and
[99]
operations basically so I'll just write
over here out of expenses yeah
[105]
by contrast if you see the implicit cost
they help to exactly to take to an
[109]
account probable alternative use of
resources and returns there of so the
[114]
cost incurred for a company typically
represents the sum total of explicit
[121]
cost
[124]
and implicit cost now what exactly is
the use of the use and relevance of this
[130]
kind of explicit or an implicit cost
see to understand the relevance of this
[134]
to type of this two types of
cost it is important to know that they
[137]
are widely employed to calculate
different types of profit so there are
[141]
several ways of defining the profit and
the two of them are what we call as the
[146]
accounting profit and second is the
economic profit so what is accounting
[154]
profit okay it is calculated by
deducting any sort of we'll be deducting
[159]
any sort of explicit costs from its
total revenues I'll just move over here
[166]
it's going to be revenue minus your
explicit cost now this represents the
[175]
calculation of profit taking into
account it real expenses incurred on
[178]
running the business operations but what
about economic profit see it can only be
[183]
calculated by deducting both explicit
and implicit cost from the revenue less
[191]
implicit and explicit costs right so
that is the thing you have to deduct
[199]
both of them to give a better idea
whether the resource they're employed
[202]
profitability profitably and enough or
they could have been employed better so
[207]
economic profit tends to be you know
usually you can say it tends to be lower
[211]
than the accounting profit
most of the time you can see that know
[218]
how to calculate this kind of
[223]
how to calculate the implicit costs
that's a question
[228]
see if renting out a fixed asset could
result in higher earnings as compared to
[233]
what a company earns by utilizing the
fixed assets for the operation it means
[237]
that the company is losing in terms of
the economic profit and in simple word
[243]
there is no use of employing
its own building for running its
[248]
operations so if a company cannot earn
more than the implicit cost of renting
[253]
it out the problem with calculating the
implicit cost is that you know they are
[257]
often hard to quantify right they are
hard to quantify
[264]
if they do not figure on the financial statement company are generally more
[268]
or less intangible so other typical
examples of implicit cost would be in
[273]
our time and resources and they are
invested in training in employee
[277]
depreciation of the equipment and so on
and so forth although you know the
[281]
depreciation could still be technically
considered as the explicit cost by some
[286]
because it is basically represents
realistic capital consumption for you
[292]
know a resource which a real expense was
made so even if it was made earlier I'll
[297]
give you an example of implicit cost so
that you know you may understand this
[300]
now let's say there is a company called
ABC and ABC has invested let's say a
[306]
sum of $10,000 in certain type of
business with a view of earning a
[310]
probable profit this amount is the
investment amount what is the probable
[315]
pre-saved
profits well that is $5,000 in a year
[322]
however to make this kind of profit he
has to forego the interest he could earn
[327]
on the same so let's suppose that he has
to forgo let's say 12% as a part of the
[334]
interest which would have been worked
out let's say the interest will be 12%
[339]
so 1200 right so this 1200 basically
represents the implicit cost of
[344]
investing the sum elsewhere this exactly
is the meaning implicit cost and I'll
[351]
try to explain you the uses the
characteristics the comparison
[356]
or probably what exactly is the role of
explicit cost over here so our topic
[362]
seems quite concise here and this is
there is it for this particular topic so
[366]
that's it for this particular topic if
you have learned and enjoyed watching
[371]
this video please like and comment on
this video and subscribe to our channel
[375]
for the latest updates thank you
everyone Cheers
Most Recent Videos:
You can go back to the homepage right here: Homepage