how accountants measure opportunity
Managers in the business world seldom have the luxury of being able to assess true opportunity cost because estimating opportunity costs would require the decision maker to evaluate all possible decisions and determining relevant values for each one. For example, the decision to replace old equipment with new equipment might contain the following possibilities: rebuilding or improve existing equipment; purchase new equipment; lease new equipment; or do nothing. Similarly, there are many other decisions and evaluating all of the possibilities would be extremely costly. So, managers often rely upon accounting costs as estimates of opportunity cost to save time and money.
Accounting costs and Inventory costs
A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment is referred as accounting cost. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring financial performance. They are backward looking. The purpose of accounting cost is to clearly reflect the economic reality to investors and creditors and also serve in tax preparation.
On the other hand the cost of holding goods in stock. Expressed usually as a percentage of the inventory value, it includes capital, warehousing, depreciation, insurance, taxation, obsolescence, and shrinkage costs. Specifically, accounting costs are problematic because the allocation process requires making estimates at the beginning of the period and because many of the overhead items allocated to inventory are fixed costs and cannot be avoided. Although allocating overhead costs to inventory is useful for conveying the total cost incurred to