Make or busy decision

[raj13941]

Could anyone let me know what is the difference between Relevant cost and Oppurtunity cost. It appears to be same for me.

[achu_eks]

Relevant cost is the cost relevant when making a decision, i.e., the cost that you will incur when a decision has been made and does not take into account any fixed or committed cost. Opportunity cost on the other hand, is the cost of foregoing an opportunity. It can be said as the cost of the second best outcome.

[Smita]

“The word ‘relevance’ here must be used in the context of decision making. Relevant cost is the cost that changes with a specific decision. It is always related to future, must be a cash flow and must differ between two decision alternatives. These costs are explicit. Sunk costs (i.e. costs that are already incurred) and committed costs can never be relevant. Differential costs are relevant for decision making.

Opportunity costs on the other hand are expressed as the benefit forgone by selecting one alternative out of many available. This cost is implicit as it is not spent actually.

Opportunity costs are always relevant costs, but all relevant costs may not necessarily be relevant.

Please read page numbers the Study guide B1 (page numbers 69-86) from GTG study text.”

[raj13941]

Thanks a lot guys. It make sense to me now. :-)