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Explicit Cost | Definition | Calculation (Example) - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell icon friend today we have a topic which is
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explicit cost no there's a dialogue box
over here I want you to understand what
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exactly is it explicit cost of the cost
that a company spends to pay for the
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wages raw materials utilities
advertisements mortgages hindrance and
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so on and so forth so we record this all
this kind of cost in the financial
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statement the only condition is that we
know it should be a cash outflow right
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it should be a cash outflow well in this
scenario the emphasize is mostly on cash
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and that's why if an accountant includes
depreciation or let's say amortization
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under the explicit cost it wouldn't be
correct now here's how we will calculate
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the explicit cost explicit
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set cost is equal to
your cash
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outflows
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recorded
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in the company's financial statements
let's understand the explanation part of
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explicit cost see as you can understand
no there isn't a set of formula that can
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that can express such cost however you
know there are few conditions that the
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item should be there to be considered as
explicit cost first you know what the
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item should be what we call as expended
the item must be expended in cash and
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for example if you're buying at
advertisement in newspaper you
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need to pay cash to the newspaper
company so advertisement expenses
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would would be does you know considered as the express explicit expenses however
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you know depreciation expense they don't
do mean an outlay you can say that
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outlay off basically cash that means
that in depreciation expenses it
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won't be considered as an explicit cost
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now second the expenses should be what
we call as tangible in nature and not an
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intangible one third the expenses should
be recorded in the financial statements
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of the companies so to understand this
we should also be and we should also
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understand implicit cost see implicit
cost are the constant actually are not
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spent but they are implied so interest
on
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owners equity
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right interest on what we call as owners
capital or owners capital rent of owners
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building our implicit cost on the other
hand the explicit cost
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or explicit expenses are just the
opposite
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of the
implicit costs and they can actually are
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called they are called as out-of-pocket
expenses or out-of-pocket costs now what
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exactly is the use of this explicit cost
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first we need to talk about the implicit
cost see there are two kind of profit
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every company ascertains
one is called the accounting profit and
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another one is called your economic
profits counting profit on one hand
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takes implicit cost
into Account Per share that's that's
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absolutely a done thing along with the
explicit cost however if you see for the
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economic profit you know it it does not
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it does not take implicit cost into
account so if we deduct the implicit
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cost from the actual profit we get
economic profit now by using the
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explicit expenses the company can
understand you know what their actual
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cost are so what I'll implied cost
exactly like for example let's say if
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the top management you know decides to
reduce the cost of the company so if
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they usually look for the explicit
expenses and not the implicit expenses
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because explicit expenses the are the
real costs that are recorded in the
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financial state and in the example we
will see you know how explicit cost I
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use in our company now the example goes something like this
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let's take a practical example so that
we can understand you know how explicit
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cost work let's say there is a company
called Kings man
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it's Kings man Kingsman tailors
they asked the accountant to find out
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what is the total explicit costs for the
last 5 years from 2013 to 2019
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there was a snapshot showing the details
whereas something like this the raw
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material consumption for every year was
closely to $1,00,000 second the
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advertisement expenditure
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expense increases every year by 10,000
and in 2013
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the advertisement expense
was 14,000 the rent for the factory has
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increased 2000 every year and in 2013
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it reduced to 25,000 every year
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the equipment
expense reduced drastically over the
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years and it was $1,50,000 back in 2013 and it reduced
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25,000 each year
so over here what you need to do is you
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need to find out the total explicit
costs for the year 2013 to 2017 so the
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calculation will go something like this
the explicit cost
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for 2013
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2014 ,2015, 2016 and 2017
first was raw material there's not going
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to be no change in this
so 1,00,000 is going to be the same for
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all the years then there is
advertisement expenditure advertisement
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was 14,000 right and there
was an increase every year right by
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10,000
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so just keep increasing 34 to 54 that
rent was 10,000 and there was increase
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every year by 2000
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control R then the next that we have
was equipment
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and well that was 1,50,000 and
there was a straight increase of 25,000
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every year control R so that's where
we get our total
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as this is
negative which it was 2,74,000 to
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4,22,000 right but over here
there is there is increase so this
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example shows us how exactly explicit
cost works we have understood every
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single detail regarding this particular
topic I hope you have got a real idea
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regarding how the whole concept has been worked out here so that's it for this
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particular topic if you have learned and
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