What is an opportunity cost?

  Under what circumstances are opportunity costs relevant to

a decision?  Why do you think financial reports for investors and managerial reports for

managers may or may not differ in their treatment of opportunity costs? 

Whether they are an individual, an investor, or a business, they miss out on potential benefits

when someone chooses one alternative over another. Because resources are scarce compared to

needs, using them one way prevents them from being used in another way. During decision-

making in business, opportunity costs play a significant role. The opportunity cost is the money

that a company spends in other ways to purchase a new piece of equipment. Rational business

decisions require companies to consider both explicit and implicit costs. Despite the importance

of the concept of opportunity cost, incorrect conclusions can be drawn due to difficulties in

implementing the concept. The perspective of the study is vital since it determines what effects

and costs should be considered. By incorporating all costs and benefits regardless of who incurs

them or obtains them, a societal perspective may hide costs shifted to another sector rather than

saved. Additionally, comparisons can significantly impact the measurement of opportunity cost

in a cost-effectiveness analysis. Comparing an intervention with all relevant interventions,

including doing nothing, would be ideal.

Therefore, opportunity costs are relevant to decision-making because the costs of choosing one

alternative include the consequences of not being able to choose the other alternatives. Financial

reporting is primarily concerned with providing investors with accurate and reliable information.

An opportunity cost is a subjective and theoretical concept that cannot be used as a basis for

evaluating events. In order to give decision-makers the information they need, management

reports should consider the opportunities the decision-makers are losing when making a
particular decision. Since comparing two alternatives quantitatively can be difficult, opportunity

costs cannot always be used. It is most effective when a common unit of measure, such as money

spent or time spent, is used.

Opportunity costs are not an accounting concept, so they do not appear in an organization's

financial records. The concept is strictly one of financial analysis.

References:

Palmer, S., & Raftery, J. (1999). Economic Notes: opportunity cost. BMJ (Clinical research

ed.), 318(7197), 1551–1552. https://doi.org/10.1136/bmj.318.7197.1551

Parkin, M. (2015, November 30). Opportunity cost: A reexamination. Journal of Economic

Education. Retrieved May 22, 2022, from https://eric.ed.gov/?id=EJ1091610