Question

Which of the following best describes an opportunity cost:

Answer 1

Answer:

The answer is A.

Explanation:

Opportunity cost is the cost of an action that was not chosen or selected. It is also the cost of alternative forgone. For example, Mr A has two choices - taking employment of $20,000 per annum or being self-employed (setting up a farm that will generate $25,000 per annum). He decides to go for farming. The opportunity cost here is the cost of taking the employment ($20,000).

Opportunity cost is relevant in decision making. Companies use opportunity cost when making strategic or tactical decisions. There must be an alternative to every decision which must be considered before making a decision.

Though opportunity cost is a relevant cost but it is never shown on financial statement. It is never part of financial records.