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Imputed Cost

Definition

In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use a factor of production for which it already owns and thus does not pay rent. It is the opposite of an explicit cost, which is borne directly. In other words, an implicit cost is any cost that results from using an asset instead of renting it out or selling it. The term also applies to foregone income from choosing not to work.

What is an 'Imputed Cost'

An imputed cost is a cost that is incurred by virtue of using an asset instead of investing it or undertaking an alternative course of action. An imputed cost is an invisible cost that is not incurred directly, as opposed to an explicit cost, which is incurred directly.

Imputed cost is also known as "implied cost" or "opportunity cost".

Explaining 'Imputed Cost'

For example, businesses that were created decades ago may own very valuable real estate in the downtown core. The imputed cost for such businesses is equal to the interest that the business would earn if those funds were invested. Another example of an imputed cost is that of a worker's decision to go back to school. The imputed cost in this case is the loss of wages.


Further Reading


Formulating the imputed cost of equity capital for priced services at Federal reserve Banks
papers.ssrn.com [PDF]
… A model must be used to impute an estimate from available data because the cost of … The broader debt-to-equity ratio that an imputation of equity to the Federal Reserve Banks … directly on the BHC sample average would also affect the comparison between the imputed debt-to …

The Federal Reserve banks' imputed cost of equity capitalThe Federal Reserve banks' imputed cost of equity capital
www.frbsf.org [PDF]
… A model must be used to impute an estimate from available data because the cost of … The broader debt-to-equity ratio that an imputation of equity to the Federal Reserve Banks … directly on the BHC sample average would also affect the comparison between the imputed debt-to …

What is the Federal Reserve banks' imputed cost of equity capital?What is the Federal Reserve banks' imputed cost of equity capital?
ideas.repec.org [PDF]
… A model must be used to impute an estimate from available data because the cost of … The broader debt-to-equity ratio that an imputation of equity to the Federal Reserve Banks … directly on the BHC sample average would also affect the comparison between the imputed debt-to …

Controlling financial distress costs in leveraged buyouts with financial innovationsControlling financial distress costs in leveraged buyouts with financial innovations
www.jstor.org [PDF]
… A model must be used to impute an estimate from available data because the cost of … The broader debt-to-equity ratio that an imputation of equity to the Federal Reserve Banks … directly on the BHC sample average would also affect the comparison between the imputed debt-to …

THE IMPACT OF DIVIDEND IMPUTATION ON FIRMS 'FINANCIAL DECISIONSTHE IMPACT OF DIVIDEND IMPUTATION ON FIRMS 'FINANCIAL DECISIONS
onlinelibrary.wiley.com [PDF]
… A model must be used to impute an estimate from available data because the cost of … The broader debt-to-equity ratio that an imputation of equity to the Federal Reserve Banks … directly on the BHC sample average would also affect the comparison between the imputed debt-to …

The value of dividend imputation tax credits in AustraliaThe value of dividend imputation tax credits in Australia
www.sciencedirect.com [PDF]
… A model must be used to impute an estimate from available data because the cost of … The broader debt-to-equity ratio that an imputation of equity to the Federal Reserve Banks … directly on the BHC sample average would also affect the comparison between the imputed debt-to …

Costly risk bearing and the supply of catastrophic insuranceCostly risk bearing and the supply of catastrophic insurance
www.jstor.org [PDF]
… A model must be used to impute an estimate from available data because the cost of … The broader debt-to-equity ratio that an imputation of equity to the Federal Reserve Banks … directly on the BHC sample average would also affect the comparison between the imputed debt-to …



Q&A About Imputed Cost


How does opportunity cost relate to scarcity and choice?

The objective of opportunity cost is to ensure efficient use of scarce resources. It incorporates all associated costs of a decision, both explicit and implicit .

What are two examples of imputed costs?

The first example is the interest a business would earn if those funds were invested. Another example is the loss of wages for a worker who decides to go back to school.

In what theory does opportunity cost play a role?

In microeconomic theory, opportunity cost plays a role in decision making.

Why is it important to consider both explicit and implicit factors when calculating opportunity costs ?

Because not everything has a price tag attached; there may also be intangible things such as personal satisfaction or happiness which must also be considered when making decisions involving trade-offs between different options .

How can you calculate opportunity cost?

Opportunity Cost = FO (returns on best forgone option) CO (returns on chosen option)

What is opportunity cost?

Opportunity cost is the loss of the benefit that could have been enjoyed if the best alternative choice was chosen instead.

What is an imputed cost?

An imputed cost is a cost that is incurred by virtue of using an asset instead of investing it or undertaking another course of action.

What are some examples of implicit costs?

Some examples of implicit costs include time spent working and time spent commuting to work.

What are some examples of explicit costs?

Some examples of explicit costs include tuition fees and travel expenses.

Who uses imputed costs?

Businesses use them and so do individuals.

How do you incorporate utility or economic benefit into your calculation for opportunity cost?

Utility or economic benefit can be incorporated by calculating how much money would need to be paid for someone else to perform an action that they otherwise wouldn't have done without compensation. As an example, if it takes $5 worth of gas for someone else to drive somewhere they otherwise wouldn't go, then this amount should be included in your calculations as well.