This is from the “Accounting Makes Cents” podcast episode #59 released on Monday, 26 February 2024.
In today’s episode, we’re going to revisit relevant costs, and talk about one in particular. This is opportunity cost. Anyway, just to give a background as to the inspiration of this episode:
Jump to show notes.
Inspiration
I recently attended a finance summit held by my company at our head office in California. Now I had to travel there, basically I took about three days out of the office. Anyway, it was a blast, and I really enjoyed it. I enjoyed seeing my colleagues and managers and other people at the Head Office that I normally deal with in my day-to-day work life. We also did some bonding and teambuilding, so that was nice.
Anyway, it got me thinking about my days out of the office and how when I came back, there was going to be a few things waiting for me and wanting my attention. And so, down the rabbit hole I went.
For those who’ve been following my blogs previous to this podcast, you would’ve remembered me talking about buying a printer and how I identified each element relevant to the decision of buying that printer. The elements were the different relevant and irrelevant costs we needed to know to ensure we are only taking costs into account that matter to the decision. If you want an overview of that, I’ll link the url of that blog post on the show notes.
Opportunity cost – attending a conference versus staying put
For this episode, as mentioned, we are going to focus on opportunity cost. I’ll take my recent trip as a good analogy example. Picture this: you’re sitting in your cozy office cubicle, minding your own business, when suddenly, your boss strolls in to offer sending you on a conference overseas. Sounds exciting, right? But hold on; there’s a twist.
So, let’s set the scene: they’ve just offered you, their star employee, this golden opportunity to go to a conference abroad. On one hand, it’s a chance for you to network with industry connections, soak up some technical knowledge, and come back armed with insights that could boost your career to the next level. However, on the flip side, you would need to leave your cozy desk and abandon your to-do list temporarily.
Now, let’s tackle opportunity cost and how it features in this scenario.
For the company, it’s not just about swiping that corporate credit card for a plane ticket for you and calling it a day. They are sacrificing something by sending you off to the conference. We’re talking about the hours of productivity lost because you’re not actually at the office, working. This potential disruption to the team’s workflow has a cost attached to it, although it’s not readily visible at this time. But the disruption cost, plus the airfare, travel costs, and conference ticket all add up and become part of the opportunity cost.
Additionally, while we were covering the costs to the company of you going to this conference, there’s also a trade-off involved at your end. You’re not just packing your bags; you’re also leaving behind a trail of unfinished projects, and maybe even a few personal commitments you’ll need to shuffle around so that you can attend the conference.
So what I wanted to highlight is that: opportunity cost isn’t just about what’s right in front of you. It’s about what could have been. It’s almost a regret type of cost, except that as you can see in this scenario, you don’t need to regret something to create an opportunity cost.
Opportunity cost – sleeping in versus seizing the day
In fact, opportunity cost is all around us. Every decision comes with its own set of trade-offs. Choosing something over another thing, it triggers an opportunity cost. For this example, I used attending a conference versus staying put at the office. But it could also be something just as simple as deciding between hitting the snooze button and getting up early to seize the day. There’s an opportunity cost there as well. Hitting snooze might mean sacrificing that extra time you could have used to exercise, prepare a healthy breakfast, or even just ease into your day with a bit of relaxation. On the other hand, seizing the day means sacrificing those precious moments of sleep, potentially leaving you feeling groggy and sluggish as you stumble through your morning routine.
We need to weigh the costs and benefits of each option. We need to ensure we make choices that align with our goals, values, and priorities, so that we can make the most of every opportunity that comes our way.
Show notes simplified
In this episode, MJ the tutor explores the concept of opportunity cost through relatable scenarios like deciding whether to attend an overseas conference or stay at work. The episode also emphasises that opportunity cost isn’t just about direct expenses or benefits but also about considering what could have been achieved by choosing an alternative course of action.
Resources and links from this episode:
MJ the Tutor on Relevant Costs
MJ THE TUTOR 