Business costs

31. Opportunity costs and sunk costs are two cost concepts managers should understand in making decisions.
Differentiate between opportunity and sunk costs.
Are they used differently in making business decisions? Explain.

Sunk cost is an expense that was already incurred and is not able to be recovered. Since these costs are already in place they are not affected by the result of the decision, and shouldn’t be incorporated in the budget for capital. If one option is chosen over the other alternative, all other possibilities of action are discarded which results in an opportunity Cost ( Zang et al. (2018)). However, these costs are often overlooked in capital planning due to them being inaccessible, and not included in financial reporting, making them easy to overlook. When calculating the opportunity cost it is essential to include them in Implicit Costs which can are a factor in their non-disclosure. Costs that have not been listed or publicly disclosed are regarded as implicit costs. This is a good thing given the clearness of sunk expenses that are reported in financial statements of companies. Because they are intangible the opportunity cost is often overlooked. Cont