Opportunity Cost in Finance and Accounting

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Opportunity cost in finance and accounting

H. G. Heymann,Robert Bloom

1 Review

Quorum Books, 1990 - 199 pages

The concept of opportunity cost, an integral part of classical economic theory, is more than two

hundred years old. Yet it is still not fully understood today. This work focuses on opportunity

cost as it affects decision making, managing, and business problem solving--where the

acceptance of one alternative precludes the acceptance of others. H.G. Heymann and Robert
http://www.google.com/search?tbo=p&tbm=bks&q=inauthor:%22H.+G.+Heymann%22http://www.google.com/search?tbo=p&tbm=bks&q=inauthor:%22H.+G.+Heymann%22http://www.google.com/search?tbo=p&tbm=bks&q=inauthor:%22Robert+Bloom%22http://www.google.com/search?tbo=p&tbm=bks&q=inauthor:%22Robert+Bloom%22http://www.google.com/search?tbo=p&tbm=bks&q=inauthor:%22Robert+Bloom%22http://books.google.com/books?id=JMRpQgAACAAJ&dq=opportunity+cost&sitesec=reviewshttp://books.google.com/books?id=JMRpQgAACAAJ&dq=opportunity+cost&sitesec=reviewshttp://books.google.com/books?id=JMRpQgAACAAJ&dq=opportunity+cost&sitesec=reviewshttp://www.google.com/search?tbo=p&tbm=bks&q=inauthor:%22Robert+Bloom%22http://www.google.com/search?tbo=p&tbm=bks&q=inauthor:%22H.+G.+Heymann%22


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Bloom clarify the issues associated with the opportunity cost principle, the measurement of

opportunity costs, and its practical applications in the areas of finance and accounting. By

providing numerous examples to demonstrate these specific issues, they make an important,

complex economic concept simple to understand. Heymann and Bloom begin their work with

simple examples that relate to the opportunity cost principle and introduce the framework in

which it has been defined. Following a discussion of basic concepts, applications in economictheory, finance, and accounting are reviewed and analyzed, and increasingly complex,

multidimensional, and interdependent problem statements are considered in relation to practical

management procedures. The book's interdisciplinary approach addresses a number of issues

related to opportunity cost, including the environment in which theories, models, and concepts

are developed; the multiple dimensions of problem situations faced by practicing managers;

various interpretations of opportunity cost in economic theory; and the relevance of opportunity

cost in computer-aided Decision Support Systems. Written in a way that even people with a

minimum background in economics can understand, Opportunity Cost in Finance and

Accounting will enhance the reader's appreciation of the many complex issues that relate to

organizational management, financial decision making, valuation, and opportunity costs. It will

be a valuable supplementary text for courses in business and public administration, as well as fordevelopmental seminars for professionals in finance, investment, and accounting. It will also be a

significant addition to public, academic, and business libraries.


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Opportunity cost is the benefit foregone from not using a good or aresource in its next best alternative use.To value the benefits (outputs) and costs, the opportunity cost measured in economic prices is theappropriate value to be used in project economic analyses.

32. Opportunity Cost of Labor. Assuming that surplus labor is available inthe project area, the economic cost of labor employed in a new project will approximatethe economic value of net output lost elsewhere, which is reflected in the rural laborwage of casual labor (say 40 taka per day). The labor rate used in the financial analysis ofthe project is the government controlled minimum wage rate of 60 taka per day. Theratio of the economic opportunity cost of labor to the project wage rate will be 40/60 =0.67. This means that the true economic cost of labor is two-thirds of the wages paid in


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financial prices.

33. Opportunity Cost of Land. The economic value of land in a project isbest determined through its opportunity cost. For example, for new projects in a ruralarea, the opportunity cost of land will typically be the net agricultural output foregone,

measured at economic prices.

34. Opportunity Cost of Water. Depending on the source of water, theopportunity cost of water may vary from zero to a very high figure. If the water in thearea is abundant, the opportunity cost of using such water is zero; but if, on the contrary,the water is scarce and an urban water supply scheme has to use some water by taking itaway from existing agriculture or industrial use, the opportunity cost of water will beequal to the value of net agricultural or industrial production lost by diverting water fromthese alternative uses. Box 6.2 shows a typical calculation.

Opportunity Cost in Finance and Accounting

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