Uncovering the opportunity cost of a factor of production that a firm already owns and thus doesn’t have to pay rent is known as imputed costing in economics. Imputed costing, also known as implied costing, or notional costing, is the cost that a firm must forego in order to use a factor of production that it already owns and thus doesn’t have to pay rent for. It is the polar opposite of an explicit cost, which is one that is incurred explicitly by the recipient. Another way of putting it is that an implicit cost is any expense that occurs as a result of utilizing an item rather than renting or selling it. Additionally, the word can refer to lost earnings as a result of choosing not to work.
What is an ‘Imputed Cost’
It is possible to incur imputed costs as a result of utilizing an asset rather than investing it or pursuing a different course of action than what was originally planned. An imputed cost is a cost that is not directly incurred, as opposed to an explicit cost, which is a cost that is explicitly incurred. An imputed cost is a cost that is not directly incurred.
Imputed cost is also referred to as “implied cost” or “opportunity cost” in some circles.
Explaining ‘Imputed Cost’
Examples include firms that were established decades ago and that have acquired extremely valuable real estate in the urban center. In the case of such enterprises, the imputed cost is equivalent to the interest that the business would earn if the money were actually invested. Another example of an imputed cost is the decision of a worker to return to school after a period of absence. The loss of wages is the cost that has been ascribed in this scenario.
‘Imputed Cost’ FAQ
What do you mean by opportunity cost what is imputed cost with example?
Simply explained, imputed costs are the opportunity costs that a company incurs as a result of the use of its resources. Suppose a firm uses its own buildings for manufacturing, and as a result, it loses the money from renting or selling such premises to other parties.
How does opportunity cost vary?
Because of a decision, the most ideal alternative is foreclosed from consideration. What is the variation in opportunity cost? The decision should be made in light of what is being given up by making the decision.
- Formulating the imputed cost of equity capital for priced services at Federal reserve Banks – papers.ssrn.com [PDF]
- The Federal Reserve banks’ imputed cost of equity capital – www.frbsf.org [PDF]
- What is the Federal Reserve banks’ imputed cost of equity capital? – ideas.repec.org [PDF]
- Controlling financial distress costs in leveraged buyouts with financial innovations – www.jstor.org [PDF]
- THE IMPACT OF DIVIDEND IMPUTATION ON FIRMS ‘FINANCIAL DECISIONS – onlinelibrary.wiley.com [PDF]
- The value of dividend imputation tax credits in Australia – www.sciencedirect.com [PDF]
- Costly risk bearing and the supply of catastrophic insurance – www.jstor.org [PDF]