Which of the following is an explicit cost?

• A. Costs paid out of pocket
• B. Wages paid by a firm
• C. Payments that are actually made
• D. Depreciation as non-cash expense

Answer: (C)

Explicit costs are the actual cash outlays a firm makes to obtain resources for production. They involve money changing hands in the production process, such as paying wages, rent, or materials. Depreciation is not an explicit cost because it is a non-cash expense—an accounting allocation of the wear on capital rather than a current cash payment. The best description of an explicit cost is “payments that are actually made,” since it highlights the cash transactions that define explicit costs. Wages paid by a firm are also explicit costs, because they are payments that are made. Costs paid out of pocket convey the same idea, but the key is that explicit costs require real cash payments in the period.