What Is Opportunity Cost?
The hidden cost of every choice, with a simple worked example.
Home › Accounting Glossary › Opportunity Cost
| Recorded in books? | No |
|---|---|
| Not the same as | Sunk cost (money already spent and unrecoverable) |
| Topic | Management accounting · Decision making |
Opportunity cost in plain English
Resources are limited, so choosing one option means giving up another. The opportunity cost is what you could have earned from the option you did not choose.
Worked example
A business has 50,000 to use. It can buy equipment that is expected to add 8,000 profit a year, or put the money in a deposit that earns 3,000 a year.
The opportunity cost of buying the equipment is the 3,000 deposit interest given up. The equipment still looks better, with an advantage of 8,000 − 3,000 = 5,000 a year.
- Counting only out-of-pocket costs and ignoring what the best alternative would have earned.
- Confusing opportunity cost with sunk cost. Sunk costs are already spent and should not influence future decisions.
Frequently asked questions
What is the difference between opportunity cost and sunk cost?
Opportunity cost is the benefit of the best alternative you forgo. A sunk cost is money already spent that cannot be recovered.
Does opportunity cost appear in financial statements?
No. It is a decision-making concept used in management accounting, not a recorded transaction.
Can you give an everyday example?
If you spend an evening studying instead of working a paid shift, the pay you give up is the opportunity cost of studying.
Keep learning
This page is for general learning. Accounting rules vary by country and standard.