Question

Identify whether the payment made for advertising is an implicit cost or an explicit cost. Justify your answer.

Answer 1

This is an actual money expense paid to an outside agency or for materials used in advertising. Since money is spent and recorded in the books, it is an explicit cost.

Answer 2

1. Explicit costs: Explicit costs are those that involve direct monetary payments made to external parties for goods or services. These costs are recorded in the firm's accounting books.
2. Implicit costs: Implicit costs, on the other hand, represent the opportunity cost of using resources that are already owned by the firm, and these do not involve direct cash transactions.

In the case of advertising, the payment made for services (whether to an external agency or for materials) is a direct money expense that requires a cash outflow. Since actual money is spent and the cost is recorded in the firm's accounts, it qualifies as an explicit cost.