Actual Costs Opportunity Costs

Actual Costs and Opportunity Costs Assignment Help

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Actual Costs and Opportunity Costs

Actual cost refers to the expenditure on producing a given quantity of a good. It consists of monetary payments made for the hired inputs plus the imputed value of the inputs and services provided by the firm itself. Thus, actual cost is the cost of all resources used in producing a particular good. Opportunity cost, however is the cost of producing this good in terms of the goods that could have been produced with these given resources, but could not be produced because these resources were used – up in production this good that has been actually produced.

The concept of opportunity cost is integral to the study of cost calculations and profits estimates of a firm. The cost of any given volume of output refers to the cost of inputs used in its production. But if these inputs were not used for this given production, of say good A, and had been used in production of some other good B, then by producing good A we are in fact sacrificing good B. thus the amount of good B not produced is the opportunity cost of good A. opportunity cost thus means cost in terms of opportunities foregone to produce other goods or sacrifice of other goods (by not producing them) by using resource in production of the given good.

The opportunity cost arises because resources are scarce in supply and thus cannot produce all the goods that we want. But these scarce resources are capable of alternative use, they can be used for production of any good A or B. thus with these given (scarce) resources if we produce A, we sacrifice B, since both of them cannot be produced. In other word, by producing A we miss the opportunity cost of A.


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