What is Imputed Costs? Definition, Example etc.

Key Points

  • Imputed costs mean hidden costs, which is incurred indirectly.
  • Explicit cost is direct costs and incurred directly.
  • Imputed costs don’t show on its financial statements.
  • Imputed Costs also known as opportunity costs.

Definition of Imputed Costs

Imputed Costs also referred as hidden or implicit costs.  Imputed means hidden. Company does not report these costs on its financial statement as separate costs because it doesn’t have financial implications.  

Hence, Imputed costs are the costs that is not incurred directly, as opposed to explicit costs which is incurred directly.  

Understanding of Imputed Costs

Although implicit costs don’t require financial expenditure, it is a cost of production, in a sense, if the factors of production were not used to produce particular goods, they could in other production and could generate additional revenue for the company/firm.

Simply, Imputed costs are the opportunity costs that the firm gives up when using its resources. Say for example, if the firm uses its own buildings for production, it loses the income from renting or selling to a third party. As the cost is not financial expenditure, company doesn’t report on its financial statement.

Example of Imputed Costs

Suppose you have a Facebook page where you sell different products and earn money. But you had the offer from a big firm to be appointed as a Financial Manager @ $ 120000 per year. If I ask you, what is your imputed cost?

The answer is very simple. You lost the opportunity of $ 120,000 and this $ 120,000 is the imputed costs.

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