Both managers and companies have to make economic decisions that are sustainable in terms of expenditure and income. Besides, the knowledge of economics suggests that managers must operate businesses within the limits of scarce resources in order to achieve developments and success. In this manner, considering both opportunity and monetary cost aids managers in making rightful financial decisions that sustain the business as well as contribute to development and economic success.
Opportunity Cost
According to Mankiw (2014), opportunity cost refers to the expenses a company has to forgo in order to produce specific goods and services. He further asserts that opportunity cost comes when a company refrains from producing one good for another. For instance, when a company allocates resources to produce Compact Discs, the same resources cannot be used in the production of Universal cable devices. In this regard, the cost the company uses to produce the CDs is at the expense of producing the USB devices; hence, it is referred to as the opportunity cost. Mankiw (2014) further contends that the economy only avails scarce resources for companies and firms. The resources thus must be allocated with priority in order to allow the production of other goods at the expense of the others. As a result, opportunity cost remains relevant in economic development since it guides companies on how to undertake their expenditures.
Monetary Cost
Monetary cost refers to the actual expenditures a company or firm has to incur in the production of any goods and services (Mankiw, 2014). Although companies can as well prioritize the incurrence of monetary cost, the company cannot forgo one cost at the expense of another. For instance, opportunity cost includes wages for employees, cost for equipment used in production, materials, and marketing cost.
Measurement, Evaluation of Monetary, and Opportunity Cost
The measurements for the monetary cost depend on the actual expenditures the company incurs. In every firm, the production process comes with costs that the firm cannot evade but limit instead. Costs such as labor, materials, and machinery can only be limited but cannot be ripped off. The measurements for these costs, therefore, are to consider the transactions in financial statements. Companies should track all the transactions that involve the fixed expenditures that it must incur in the production process. The recording and calculations of these costs will, therefore, tell the company how much monetary cost it uses in the production. On the other hand, opportunity cost is evaluated by differentiating it from the monetary cost. According to Mankiw (2014), opportunity cost is the forgone cost in the production process. Evaluating the cost, therefore, requires one to identify the opportunities missed and the chosen options and compare their differences. The cost is hence calculated by subtracting the income from the chosen alternative from the income of the missed alternative.
Opportunity Cost vs. Monetary Cost
Opportunity cost comes when a company chooses an alternative production of goods at the expense of another. The company has the chance to prioritize its expenditures having compared its cost-effectiveness. Monetary cost, on the other hand, refers to the actual costs that the company has to incur to produce a specific good and service. According to Mankiw (2014), some economists differentiate tangible monetary cost from the less tangible opportunity costs using implicit and explicit costs. In this view, opportunity cost results from the forgone allocation of resources to make production of other goods. The resources allocated for this production, thus becomes the monetary cost.
Conclusion
Opportunity cost and monetary cost help companies plan for their financial expenditure in order to operate within the scarce resources of economics. The discussion in this paper has illustrated in detail the two terms and their differences and economic impacts.
Reference
Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.
