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LO $1-5$ Understand cost classifications used in making decisions: differential costs, sunk costs, and opportunity costs.

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We will discuss cost classifications used in making decisions: differential costs, sunk costs and opportunity costs. For purposes of making decisions, the concepts of differential cost and revenue, sunk cost, and opportunity cost are vitally important. Differential costs and revenues are the future costs and revenues that differ between alternatives. Sunk cost is a cost that occurred in the past and cannot be altered. Opportunity cost is the benefit forgone when one alternative is selected over another.$$ Differential costs and opportunity costs are always relevant and should be carefully considered in decisions. Sunk costs are always irrelevant in decisions and should be ignored.

Opportunity Cost

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Knowledge Check $01$

Which of the following statements about opportunity costs is not correct?

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An opportunity cost is the potential benefit that is given up when one alternative is selected over another.

An opportunity cost cannot be changed by any decision made now or in the future.

Opportunity costs are not usually found in accounting records.

Opportunity costs are costs that must be explicitly considered in every decision a manager makes.