We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is an Imputed Cost?

By Justin Riche
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Imputed cost, also referred to as opportunity cost, is a concept based on an economic theory, which basically states that to obtain anything one must give up something in return. For example, to get a full-time four year college education, one may need to forgo the opportunity of working full time and earning $20,000 US Dollars (USD) per year in that period. The $20,000 USD is the imputed cost. Among other concepts, the imputed cost concept is essential when computing economic profit. This is derived by taking the net accounting profit or loss and deducting the imputed cost.

The theory behind imputed cost is that of trade-off. In essence, the trade-off theory states that virtually everything comes with some type of price tag. For example, to create and maximize wealth, some firms may engage in activities that harm the environment. To combat this, governments may implement environmental protection laws, which may curtail pollution, and in turn humans may greatly benefit from a less polluted environment. The imputed cost associated with this, however, may be the increase in cost of production for the firms, which may result in less profits and less job creation, among other results.

As one of the various concepts of economics, imputed cost is associated with many other concepts and practices in economics and business. These include concepts like cost-benefit analysis, economic profit, and hobby loss. Cost-benefit analysis, in essence, is the act of making business decisions after considering all viable options and weighing all the direct and indirect pros and cons. Generally, after conducting such an analysis a firm will choose the option that serves its purpose the most.

Economic profit is different from accounting profit, because in its calculation it considers both explicit and implicit costs, whereas accounting profit is only concerned with the tangible or explicit costs. To illustrate, for example, consider a firm that buys a machine whose main purpose is to produce specific items. Suppose the firm rents the machine, which brings in an annual net income of $20,000 USD. On the other hand, however, if the firm had gone with the alternative, that of producing the items and selling them itself, it would have made a net income of $25,000 USD. In such a scenario, the firm's economic loss would be $5,000 USD, and so the firm would have earned no economic profit.

Most often, people engage in activities from which they derive personal enjoyment. If these activities do not produce an income on a regular basis, then they are considered hobbies. Any loss produced while engaged in these activities is referred to as a hobby loss and cannot be claimed when filing tax returns. Theoretically, hobby losses are compounded on by imputed costs. That is, for example, an individual may incur a loss through a hobby, whereas that pastime would have been spent earning employment wages in the first place.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.