Everybody has made a bad investment in their lives that they regret deeply. However, some people double down on bad investments and end up losing more money. I would like to discuss opportunity costs and sunk costs concerning business decisions.
Opportunity Costs
Opportunity costs are the potential gain that you might have if you put the money into an alternative investment (Weygandt et al., 2012). This type of cost needs to be considered when making a business decision because this will affect where the money will be placed. For example, if you have a property that could be used for a restaurant, you might have the option to rent or to create the restaurant on your own. You must consider how much you could make a month by renting the restaurant compared to how much you would make by starting a restaurant. Once the choice is made, the opportunity cost is the endeavor that you did not choose.
Financial statements don’t show opportunity costs, but they must be considered because that is an income that has been forgone because other opportunities were chosen (Marshall et al., 2011). Thus, as a manager or a person making decisions, you must be aware of the opportunity costs because these decisions might affect the bottom line.
Sunk Costs
Sunk costs are the ones that were already incurred when a product or service is acquired and no decisions made could affect these costs (Braun & Tietz, 2018). These costs cannot be changed by any decision made now or in the future. Thus, you should not take them into consideration while making decisions because those costs are in the past. Always try making decisions that maximize your investments.
Assuming that you bought several extra computers expecting that your company will grow rapidly and new personnel will be needed. If the company grows or not, there is nothing that you could do to change those costs. Therefore, they should not be part of future or present decisions affecting the company.
References
Braun, K. W., & Tietz, W. M. (2018). Managerial Accounting (5th ed.). New York, Ny Pearson.
Marshall, D. H., Viele, D. F., & Mcmanus, W. W. (2011). Accounting: What the Numbers Mean. Mcgraw-Hill Irwin.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2012). Accounting Principles (10th ed.). J. Wiley & Sons.
