Explicit Cost Analysis

There are many different cost and structures that need to be considered when forming a profitable business. A companies expansion can play a role in how some of these concepts are engaged. Furthermore, understanding the level of success a company has can be measured in multiple ways. In this paper I would like to discuss the types of costs a company can expect to have, and they ways these cost can be determined and understood. Then closing with an explanation of how these can affect an expansion of our business and profits.

Implicit and explicit costs are completely different, but are both important to understand when looking at a company’s finances. The simplest way to differentiate between the two is that one is a business expense and the

These are transactions where money leaves the company, such as payroll, buying assets, renting office space, etc. One example we will see many times in our careers is purchasing supplies. Companies pay money to other business that provide them the materials needed for their product or service. The company I work for offers a variety of spa service. We need materials to complete these services such as lotion, cotton, nail polish, skin care products, and many more materials. The company spends some of their tangible assets to purchase those, therefore, they are explicit costs.

Alternatively, there are costs that do not result in spending tangible assets, instead they deal in opportunity costs. For example, there are employees that temporarily change their job descriptions, resulting in implicit costs. At my current position, I am a trainer for my company they send me to other cities to train new employees. While I am away training, I cannot be completing my normal job functions. This does not necessarily cost the company any tangible assets, but it does result in an opportunity cost, and by extension an implicit cost (Investopedia,

For instance, a business owner may have just taken out a loan to launch a new product and that product is taking off. Their accounting profit will not be great at that time but they are selling units and will eventually turn an accounting profit. The opportunity cost was successful because even though they owe money they are creating brand recognition and loyalty, which could lead to future success.

The last component I want to discuss in this paper is economies and diseconomies of scale. The ideal situation for a business is that it will grow, and the more they produce the less it cost to make that product. This situation is called economies of scale, and it is a common outcome of expansion (Openstax, 2016). This is often why large companies can afford to sell items at a lower price than small businesses.

While economies of scale is common, there is still another possible outcome. Unfortunately this one is less appealing but one that depends largely on the marginal cost of a business’ product. It is known as diseconomies of scale, and it generally happens when a company expands faster than it can handle. Ultimately, the factory or firm is inefficiently managed and organized. Common problems stem from too many employees, which raises the company’s costs and reduces the rate of production. The chain of command is too long and this can create a disconnect between upper management and workers (Openstax,