A Term Paper on the Recognition of Opportunity Cost and Relevant Cost: a Tool for Effective Business Decision Making

A TERM PAPER ON THE RECOGNITION OF OPPORTUNITY COST AND RELEVANT COST: A TOOL FOR EFFECTIVE BUSINESS DECISION MAKING BY IWUCHUKWU UCHENNA IWUAKU O9AA08549 ACCOUNTING 300L LECTURER: MRS OBIGBEMI INTRODUCTION The role of opportunity cost and relevant cost cannot be overemphasized in the making effective decision making. They work hand in hand in making sure that the company makes the best economic decision, they are both used in making managerial decisions at every level of planning and decision making. To buttress my point I would like to give you an insight on the meaning of opportunity cost and relevant cost, also I would like to also show the similarities between them and also their use in effective decision making. What Is Relevant Cost? Relevant costs are costs that differ between two or more business alternatives. If costs are common or equal between the alternatives under consideration, then such costs are unlikely to be relevant to the decisions being made. An example would be historical costs because they are costs that are sunk or that have already been incurred, therefore they are not relevant to the decisions relating to the future prospects of the business. Relevant costs are similar to variable, avoidable and controllable costs, as these costs can only be incurred if a business decides to take a certain course of action. If the business decides to do nothing, then such costs will not be incurred or will be avoided. Relevant costs also share some characteristics of marginal costs because relevant costs are the incremental costs of the alternatives under consideration. It is relevant costs that matter or that are relevant when making decisions about choosing between two or more business alternatives because these relevant costs are directly related or correlated to the decisions being made. A relevant cost is a future cash flow arising as a direct result of a decision. It is a cost that needs to be taken into account in any particular