Write a short note on: Actual costs and Opportunity Costs | Managerial Economics Notes

Write a short note on: Actual costs and Opportunity Costs | Managerial Economics Notes

Answer:
Actual costs are also called as outlay costs, absolute costs and acquisition costs. They are those costs that involve financial expenditures at some time and  hence  are  recorded  in  the  books  of  accounts.  They  are the  actual expenses incurred for producing or acquiring a commodity or service by a firm. 

 

For example, wages paid to workers, expenses on raw materials, power, fuel and other types of inputs. They can be exactly calculated and accounted without any difficulty.

 

Opportunity cost of a good or service is measured in terms of revenue which could have been earned by employing that good or service in some other alternative uses. In other words, opportunity cost of anything is the cost of displaced alternatives or costs of sacrificed alternatives. 

 

It implies that opportunity cost of anything is the alternative that has been foregone. Hence, they are also called as alternative costs. Opportunity cost represents only sacrificed alternatives. Hence, they can never be exactly measured and recorded in the books of accounts. 

 

The knowledge of opportunity cost is of great importance to management decision. They help in taking decisions among alternatives. 

 

While taking a decision among several alternatives, a manager selects the best one which is more profitable or beneficial by sacrificing other alternatives.