What Is an Imputed Cost?

Definition

Imputed Cost—is the cost allocated for resources or use of a service which does not involve a cash outlay. They are hypothetical costs and are not recorded in the books of accounts.

There are those costs which do not involve cash outlay. These are not included in the cost accounts. But they are important and management gives greater importance to such costs.

Interest on capital is such a cost which does not find a place in cost computation but which is the most important consideration from every angle which is certainly helpful in judging the relative profitability of the projects. These costs are also known as Hypothetical overheads.

Explanation

Imputed cost is used in a narrower context (as compared to the concept of opportunity cost) and generally relates to the interval events of the organization. Examples of imputed cost include interest on owners equity, rent of building owned by the firm etc.

However, in some cases, the concept of opportunity cost and imputed cost may be used interchangeably.

FAQs

The term imputed means "to bring into existence through calculation" or "to make or regard as being rather than actual." Thus, the imputed cost is the cost of using an asset without actually incurring any expenses.
A good example of the imputed cost would be the annual interest accrued on money that is held in a savings deposit or investment account. This "imputed" or "phantom" cost benefits the owner by increasing the money in his possession, even though no real cash was spent.
The two concepts are closely related, but there is a difference in that an opportunity cost denotes the loss of potential income when choosing between or performing certain tasks. For example, if you choose to attend college full-time instead of working full-time, your foregone earnings (opportunity cost) would be the full-time salary you could have earned.
Having an understanding of the amount of money that your business would be making if it invested in another form, such as government bonds or treasury bills, can help you to make more informed decisions about investments and Capital Expenditure.
The formula for imputed cost is as follows: Imputed Cost = Capital Employed x Cost of Capital

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.