The measurement of costs differs from the economic and accountant perspectives. In accounting, to calculate the cost should be evaluated the price of raw materials, explicit costs, and salaries that are paid to employees. However, from the economic view, it is a little bit different since calculating the opportunity costs should be considered as well. Therefore, this paper aims to observe the concept of opportunity cost and illustrate the idea with real-life examples.
Opportunity or economic cost is an initial part of the business process and plays a crucial role for stakeholders and investors. The opportunity cost calculation represents the distinction between the returns of investments of the declined and accepted option. When the management decides which direction will be the most successful for the company and bring a lot of profit, they have to consider all the possible outcomes (Fagan, 2020). Choosing one opportunity over another always comes with some benefits and losses. The central task is to see all the possible opportunities and choose those that will bring more profit.
In real life, regular people face the concept of opportunity cost practically every day. One of the situations that illustrate how it is integrated into the person’s lifestyle is a student who studies for an exam but wants to go to a movie. If they continue their study, they will get a grade and eventually pass the exam. If the student goes to the movie, they can rest and get pleasure from the film but will be less prepared for the examination. Thus, the investments that the management has declined are called opportunity costs because in favor of better perspectives, the firm inevitably losses other options.
Wise decision-making determines the company’s future financial success, and whether the risks were calculated wise or not, it can maintain the capital or lose it. Every option has to be weighed and considered carefully, especially if the shareholders are considering making a considerable investment (Fagan, 2020). For instance, the management raises the question about improving the company’s productivity, and there are two ways to achieve it. The first one is to invest in the equipment and upgrade the technology. Another choice is to spend more capital on the hiring process and recruit more high-quality specialists for the leading positions. The employees who already work in the company should get additional training and improve their qualifications on the specially organized courses.
Considering the strengths and weaknesses of the company, the shareholders investing the money in that field in perspective should bring expected positive results. Suppose they choose to invest in the equipment, then they will have to automatize some aspects of jobs that usually are performed by people and will increase the speed of the technological processes. In case the management chooses to focus on human resources, it will get better performance from the employees and innovative approaches to the company’s development. In both ways, the organization losses and gains something, and the question that they should answer in the first place is what will lead the company to the desired results more quickly and successfully.
In conclusion, to manage the company’s development wisely, one of the essential aspects that should be considered is the opportunity costs. Investments can bring a high profit and significant losses for the organization, and only adequately weighed decisions and risks can increase the chances of positive outcomes. Choosing between the options and comparing them is better to be oriented in the long run and carefully calculate all the risks.
Reference List
Fagan D. (2020) Real-Life Examples of Opportunity Cost. Federal Reserve Bank of St. Louis. Web.