Explicit costs
A. include forgone income of the firm’s owner
B. include only direct monetary costs of the firm
C. none of the above
D. include all of the firm’s opportunity
The correct answer and explanation is:
The correct answer is B. include only direct monetary costs of the firm.
Explanation:
Explicit costs are the actual, out-of-pocket expenses that a firm incurs in its operations. These costs are directly measurable and involve monetary payments for resources like wages, rent, utilities, and materials. Essentially, explicit costs refer to all expenses that require a firm to pay money, which are recorded in financial statements.
Some common examples of explicit costs include:
- Wages and Salaries paid to employees.
- Rent for the use of land or buildings.
- Raw materials or goods used in production.
- Utilities like electricity and water bills.
- Interest payments on loans.
The key characteristic of explicit costs is that they are actual expenditures that involve a cash outflow. These costs are clearly visible and are usually what people think of when they talk about the costs of running a business. Explicit costs are part of the firm’s accounting costs, and they are necessary to understand the financial performance and profitability of a business.
It is important to distinguish explicit costs from implicit costs, which are the opportunity costs of using resources that could have been employed in alternative ways. For example, the income the owner could have earned by working elsewhere is an implicit cost, not an explicit one. Explicit costs are easier to identify because they involve direct payments, while implicit costs are more subjective and reflect the value of foregone opportunities.
Therefore, the right choice is B, since explicit costs only include the actual monetary payments and do not take into account the opportunity costs or foregone income.