University of Central Florida (UCF) ACG2071 Principles of Managerial Accounting Practice Test 1

The term opportunity cost represents the potential benefit lost when one alternative is selected over another because it is a fundamental concept in economics and managerial accounting that emphasizes the value of the next best alternative that is forgone when making a decision. When an individual or business chooses one option, the opportunity cost is the benefit that could have been gained from the path not taken.

This concept helps in assessing the true cost of decisions, as it not only considers explicit costs (like money spent) but also the implicit costs related to the value of the foregone alternative. For instance, if a company decides to allocate resources to develop one product over another, the opportunity cost would be the potential profits and benefits it could have gained from the unchosen product. Understanding opportunity cost aids in better decision-making, fostering an awareness of trade-offs in resource allocation.