Opportunity costs may be defined as the benefits or chances which is missed out by an individual or a business when it chooses one alternative over another. It is to be noted that the financial reports which are formulated by a business does not depict the opportunity costs but the same needs to be considered while taking any decision regarding the operational process of the business. The concept of opportunity costs is quite significant in the field of economics as well. It is a known fact that the human wants are unlimited and every individual has a desire to satisfy such wants using the resources which he has. But there are a lot of alternatives and therefore choice is an important constraint which needs to be considered. The costs of forgoing any option is regarded as opportunity costs. In other words, a commodity which is forgone for producing another commodity can be considered as an opportunity costs for the business. An example can be provided for opportunity regarding a business which undertakes an investment in a machinery which can deliver an output of 500 units but there can be another better machine in the market which can produce more outputs but the same is costly. In such a case, the business is sacrificing the opportunity to invest money in the better machinery and therefore the same can be considered as opportunity costs. In a business environment, it is considered to be essential to consider opportunity costs especially in case of investments which are undertaken by a business. The business needs to have a clear idea regarding the investment option which they are sacrificing while selecting the other. The concept of opportunity costs is considered to be important from the social perspective because of the choices which it provides to the individual and it indirectly allows the individual to effectively allocate resources in an efficient manner. In addition to this, opportunity costs are also useful in providing information regarding relative prices of different commodities. This effectively helps in decision making process of the business. Plus the concept is used for fixing a price for a factor. Therefore, it can be said that application of opportunity cost theory can lead to optimum utilization of resources in the business and better decision making process from an individual and even in businesses.
Accounting profits may be described as the surplus which is generated by a business when the explicit costs of the business are deducted from gross revenue of the business. On the other hand, economic profit is computed by deducting the implicit costs and explicit costs from gross revenue. This means that economic profits take into consideration the impact of opportunity costs on profitability of the business. Accounting profits are real profits and the same are depicted in the financial statements while economic profits refers to abnormal profits and the same also considers the effect of opportunity costs. In general terms, accounting profits are much more than economic profits which is mainly due to the involvement of variety of expenses and income in case of economic profits. The same is not the case in case if accounting profits. The accounting profits would be considered more by the accountants and even by the shareholders as the same holds importance in terms of generation of profits. The accounting profits are also considered when the company decides the dividends which is to be distributed among the shareholders of the business. In other words, it is clear that accounting profits are the profits which is available to the shareholders post meeting all economic expenses but the same does not considers the effect of opportunity costs.
Accounting profits are more based on formulas and applies a practical approach for the purpose of computing the profits in the first place. While on the other hand, economic profits apply a more theoretical approach in computing the profits and it is more concerned with the alternatives which is available to the business. Accounting profits takes into consideration several important expenses such as labour costs, inventory costs, transportation costs, sales and marketing costs and other administration overheads. The term accounting profits are more used term in business environment and it is considered to be the actual profits. In case of economic profits, the opportunity costs which is associated with a choice which business makes and the costs associated with the same is reflected in such a concept effectively.
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