Opportunity Cost Essay

1808 WordsMay 11, 20118 Pages
Opportunity cost for decision making: A teaching resource to describe the difficulties of practice INTRODUCTION: The difficulties associated with the use of opportunity cost as a decision making aid are generally not discussed in the management accounting related texts. But most of the new management texts devote at least some coverage to the calculation of relevant cost and benefits for the decision making, and commonly the concept of opportunity cost is utilized as an integral part of this coverage. Opportunity cost is defined by many of the economists, but the main focus of every one of them is on the “contribution or profit that is forgone (rejected) by using limited resources for particular purpose”. OC remains at the heart of study of decision making today, it being seen as useful both in the calculation of merit of competing alternatives and as a way describing the preferred alternatives. This research paper comprises of following parts: • Strengths and Limitation of Opportunity Cost. • A worked example that illustrate the difficulties which may limit OC as a practical decision aid. An alternative cash flow approach that overcome the difficulties by the use of OC approach. • Discussion and Conclusions. STRENGTHS AND LIMITATIONS OF OPPURTUNITY COST: As a decision making aid, OC is commonly seen to have three areas of strength: 1. It forces consideration of all alternative course of action 2. It is a convenient, expedient and economical technique of analysis 3. It has certain communication advantages. It can highlight the overall benefit of a particular decision. Exploring of the above strengths are as follows:  Decisions are concerned with choices between alternatives and, consequently, any method of determining costs and revenues for decisions which attempts to deal with opportunities in isolation is unlikely to provide a

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