Opportunity Costs Are Relevant Costs

Opportunity cost introduces an additional concept that is not available like part of normal cost analysis in the accounting record system. Opportunity cost may be defined by 'the best opportunity foregone via following a specific course of action' it may be redefined with the net cash flow lost via choosing one alternative quite than another. Opportunity cost may be essential in a number of decision making situations wherever an alternative option between possible futures courses of action examples are is as:

a) Whether to close a department instantly or in one year's time

b) Whether to operate an internal service department or to employ an outside service

c) Whether to accept one or another of two jointly exclusive contracts

Opportunity costs will be part of an incremental cost and revenue analysis in many type of decision making conditions.