Current vs Saving Deposits and Explicit vs Implicit Costs Q7

Q.
a) Explain the difference between Current Deposits and Saving Deposits. (10 marks)

b) Describe the difference between explicit costs and implicit costs by definition, concept and appropriate examples. (10 marks)

(20 marks, 2018 Q7)

a) The question asks about current versus saving deposits in commercial banks in Malaysia. So, it can be differences between current account and savings account.

There is a wide range of current and savings account available today in the Malaysian market. From the simplest basic accounts to shariah compliant accounts, the Malaysian market has something for everyone today. The difference between a current account and a savings account therefore should be seen more in the difference in usage than in the offerings.

Difference between Current and Savings Account

Let us have a look at what the average current account and the average savings account in Malaysia is like, to be able to understand the fundamental differences-

The savings account

The savings account is a type of account that lets the account holder deposit money and withdraw money and perform other basic banking tasks, while also enjoying a certain benefit from interests accrued. Since the interest benefit is relatively more with a savings account, most of these have some restrictions over withdrawal of funds. The interests available in the savings accounts category however are lesser than what is normally available in the Fixed Deposit category.

Savings accounts in Malaysia come in a variety of flavors, tailor made for the target section. Basic, without ‘extras’ accounts with minimal fee, to start with, Online Savings accounts for those who are more active online, Senior Citizen savings accounts and even for Kids. It is the commonest category of account, across Malaysia and almost anyone with an income to hold in a bank starts off with this category of account.

Every bank has it’s own savings account interest rates and tenure specifications.
A debit card and ATM withdrawal facility are offered on most savings accounts.
A cheque book facility is not offered.

A Current Account

A current account is a type of a deposit facility that allows the account holder to deposit, withdraw

transfer funds etc for personal or for business purposes. Typically, business people opt out for a current account preferring it over the savings account because of the ready access they have to their funds. Unlike a savings account, in a current account there are lesser restrictions or no restrictions at all to the access of funds and therefore benefits from interest too are much lesser. Cheque payments, cheque and cash deposits, funds transfer, and inter bank transfers etc can be done more frequently with a current account as compared to a savings account.

There both interest accruing current accounts and no interest accruing current accounts in Malaysia.

Cheque book facility is offered

Interests are characteristically low

Ref:

Difference between Current and Savings Account

b) Implicit versus explicit costs

Repeat of 2015 Q5

An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. It represents an opportunity cost that arises when a company allocates internal resources toward a project without any explicit compensation for the utilization of resources. This means that when a company allocates its resources, it always forgoes the ability to earn money off the use of the resources elsewhere.

Implicit costs can also be called imputed, implied or notional costs. Businesses don’t necessarily record implicit costs for accounting purposes because money does not change hands. These costs represent loss of potential income and not of profits. A company may choose to include these costs as the cost of doing business since they represent possible sources of income.

Examples of Implicit Costs

Examples of implicit costs include the loss of interest income on funds, and the depreciation of machinery for a capital project. Implicit costs can also be intangible costs that are not easily accounted for, such as situations in which an owner allocates time toward the maintenance of a company, rather than allocating those hours elsewhere. In most cases, implicit costs are not recorded for accounting purposes.

When a company hires a new employee, for example, there are implicit costs to train that employee. If a manager allocates eight hours of an existing employee's day to teach this new team member, the implicit costs would be the existing employee's hourly wage, multiplied by eight. This is because the hours could have been allocated toward the employee's current role. In corporate finance decisions, implicit costs should always be considered when coming to a decision on how to allocate company resources.

Difference Between Implicit and Explicit Costs

Implicit costs are technically not incurred and therefore cannot be measured accurately for accounting purposes. There are no cash exchanges in the realization of implicit costs. However, they are important costs to ascertain because they help managers make effective decisions on behalf of the company.

This is in stark contrast to explicit costs, the other broad categorization of business expenses. These costs represent any costs involved in the payment of cash or other tangible resource by a company. Rent, salary and other operating expenses are considered explicit costs and are recorded within a company's financial statements.

The main difference between the two types of costs is that implicit costs are opportunity costs, while explicit costs are expenses paid with a company's own tangible assets. This makes implicit costs synonymous with imputed costs, while explicit costs are considered out-of-pocket costs. Implicit costs are harder to measure than explicit costs, which makes implicit costs more subjective than explicit ones. Implicit costs help managers calculate overall economic profit, while explicit costs are used to calculate accounting profit and economic profit.

[An example of implicit cost is the goodwill to maintain some networking with key policy makers in the government. For example, implicit cost of supporting some sampling program in a government hospital for using the new medication. The sampling program could not be measured as cost of sale, because it was never sold. However, it has some unit cost and the time and energy to conduct the trial also incur staff time and money. There is also risk of adverse event reporting. These are all costs and risks in the eventual launch of the new medication.]

Ref:

[x] own account.