Explain Explicit Cost with Definition and its Application

The explicit cost represents the outflow of money from the business that reduced the profit of the business. The useful practices of the explicit costs including the various expenses such as wages, expenses, rent or payment of lease instalment cost and that cost include all those costs which occurred at the time of the production of goods. That cost includes the accurate outflow of cash from the business.

DEFINITION

“Direct payment which is made to another in course of running the business. The Cost which includes such as wage, rent, and material. The explicit cost includes all these expenses which are identifiable and easily accountable”.

APPLICATION OF EXPLICIT COSTS

The outflow of cash reduced the profitability of the business. Which reduced the earning capacity of the business? That costs in every business organizations include all the transactions that show the factors of production which are utilized in the business.

The company must maintain the reserves for the efficient payment of the basic and fundamental production expenses for the payment of the explicit cost the company should expand the cash.

If the company does not maintain the suitable reserve for payment of basic factor then the company not able to earn the decision and expected a profit. The explicit cost of the business can also be variable or fixed it totally depends upon the ratio through which the output (production) of the company increase.

Explicit Cost Relate to Fixed Cost

Fixed cost does not change with the change in production level increase whereas the variable cost is totally reversible to the fixed cost which is changeable due to the change in the production level. A company explicit costs depend on the payment of employees wages payment of factory rent, payment of electricity bills, payment of wages and payment of mortgage loan and also explicit cost include the cost of depreciation on the fixed assets. The costs also include the payment on a purchase and carrying and installation cost of the fixed assets such as equipment.

That costs a business considered rent and also include the mortgage payment and the cost on the payment of equipment of business is known as the fixed cost. That Cost of business include the payment of the wages because the cost which is paid as wages increase the production level of business. Equipment maintains cost and utility payment for retail business increase the business production.