Opportunity Costs: A Tool to Make Better Business Decisions

• In Event: Emerging Research Session IV: Ethics, Management Accounting and Governmental Accounting

Abstract

Opportunity cost is a component of the collective concept of economic cost, which generally equals the difference between the costs of the desired and of the next best alternative. Economic costs are collectively composed of total costs (fixed costs plus variable costs as they appear in cost accounting), average costs (average fixed costs plus average variable costs), marginal costs, transaction costs, sunk costs and accounting costs besides opportunity costs. CPA clients and many other businesses often make erroneous decisions because they ignore the economic implicit costs necessary to properly apply the opportunity cost model. We propose models for calculating opportunity cost, including sunk and implicit costs, which management often considers as irrelevant for decision-making purposes; discuss some strengths and weaknesses of these models; and relate opportunity costs to transfer pricing.

Authors

• Mohamed Bayou, University of Michigan–Dearborn

• Alan Reinstein, Wayne State University

• gerald H. Lander, University of South Florida, St. Petersburg