Wednesday, May 5, 2010

Actual or outlay or costs and opportunity costs

Actual or outlay or costs and opportunity costs
The costs that are generally recorded in the books of account is called the actual costs.They consist of actual expenses of hiring land,labour,capital and management.The opportunity costs is the alternative that has been foregone.The opportunity cost of any good is the next best alternative good that is sacrificed.For example,the factors which are used for the manufacture of car may also be used for the production of military equipment.Therefor,the opportunity cost of the production of car is the output of the military equipment foregone.
The returns which the entrepreneur could have earned in an alternative use of his services and capital is called opportunity or alternative cost.Since the opportunity cost is a national cost,they are not recorded in a book of account.But they are useful for the purpose of decision making.The opportunity cost concept applies to all situation where a thing can have alternative uses.If there are no alternative,the opportunity cost will be zero.If alternative uses are many,the earning in the next best use will be the opportunity cost.According to Pappas and Brigham-"The alternative cost concept,then,reflects the fact that all decisions are based on choices between alternative actions.The cost of resource is determined by its value in its best alternative use."

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