Imputed Cost (Implicit Cost) - Explained
What is an Imputed Cost?
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Table of ContentsWhat is an Imputed Cost?How does Imputed Cost Work?Academic Research on Imputed Cost
What is an Imputed Cost?
An imputed cost, also known as an implicit cost, notional cost, or implied cost, opportunity cost and implied cost. This refers to the cost incurred when an asset that can be invested is used or is serving another purpose. An imputed cost is a hidden cost, it is often incurred when an asset is used for a particular purpose instead of assigning it another function. Imputed costs are not direct costs, they are incurred in an obscure or unseen manner.
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How does Implicit Cost Work?
Oftentimes, imputed costs are not reported as distinct costs or expenses, in fact, they hold no primary importance when it comes to making vital policies touching management and budgeting. Unlike explicit costs that are direct costs and can readily be reported, imputed costs are dicey to estimate, they are hidden or implicit costs. This is why no formal accounting standards exists for reporting imputed costs. Imputed cost can be incurred by a business for instance if there are other ways to put an asset to use but the company decides to stick to the use of the asset for a specific purpose, by using this asset, implicit costs are generated.
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