Explicit Costs: Definition & Examples

Explicit Costs: Definition & Examples
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  • 0:02 What Are Explicit Costs?
  • 0:51 Examples of Explicit Costs
  • 2:33 Lesson Summary
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Lesson Transcript
Instructor: Tara Schofield
Explicit costs have a direct effect on a business and on the amount of money a business has available. This lesson explains explicit costs and gives two different examples of explicit costs in a business.

What Are Explicit Costs?

Explicit costs are expenses that require a payment to be made. They lower the amount of cash and money your business has available and include items like payroll, rent, supplies, marketing, etc. These are expenses that require a check be written or payment made to cover the costs.

Much like a personal budget, explicit costs in a business must be managed and may need to be cut if revenue decreases. For instance, if business is slow or sales are down, smaller amounts of inventory may be ordered or fewer staff hours may be needed. These cuts will affect the total explicit costs. However, there are other costs that you may not be able to cut. If you shorten your business hours, you may save money on payroll and expenses, but you will still have rent, insurance, and other set explicit costs that must be paid.

Examples of Explicit Costs

Let's say you own a small pizzeria where you serve pizza, pasta, salad, drinks, and various desserts. You have a thriving business with 5 full-time and 3 part-time employees. You invested in the best pizza ovens, equipment, and furniture to ensure you had the best shop in town.

At the end of the month, you pay your bills and update your financial records. You write checks for pizza supplies, payroll, rent, utilities, and equipment loan payments. These are all explicit costs because they are measurable and require a payment for a specific amount of money.

Let's look at another example. You have just started your business as a small business accountant. You do bookkeeping, taxes, and payroll for small businesses. You find yourself doing some work for clients that you don't bill for because you want to build loyalty with customers and grow your business.

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