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Opportunity cost concept: The opportunity cost of the value of opportunity foregone is taken into consideration when alternatives are compared. Opportunity Cost is the value of the next best alternative. In other words, it is the opportunity cost lost by diversion of an input factor from one use to another. It is the measure of the benefit of opportunity foregone.
The opportunity cost is helpful to managers in evaluating the various alternatives available when multiple inputs can be employed for multiple uses. These inputs may nevertheless have a cost and this is measured by the sacrifice made by the alternative action in course of choosing another alternatives.
Opportunity cost is a measure of the benefit of opportunity forgone when various alternatives are considered. In other words, it is the cost of sacrifice made by alternative action chosen. For example, opportunity cost of funds invested in business is the interest that could have been earned by investing the funds in bank deposit.
Decision making: Opportunity costs apply to the use of scarce resources, where resources are not secure, there is no sacrifice from the use of these resources. Where a course of action requires the use of scarce resources, it is necessary to incorporate the lost profit which will be foregone from using scarce resources.
If resources have no alternative use only the additional cash flow resulting from the course of action should be included in decision making as relevant cost.
Decision making: Opportunity costs apply to the use of scarce resources, where resources are not secure, there is no sacrifice from the use of these resources. Where a course of action requires the use of scarce resources, it is necessary to incorporate the lost profit which will be foregone from using scarce resources.
If resources have no alternative use only the additional cash flow resulting from the course of action should be included in decision making as relevant cost.
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