One of the courses I love to teach at National Louis University is the Managerial Accounting course in our MBA Program. The majority of students who take this course come in to it needing it to graduate. They don’t share the passion and excitement I have for the course, at least not when they start it. Learning the “jargon” is one of the first challenges in this course. There are a lot of new accounting terms to understand before we begin the journey of learning how to use them. For example, we spend time defining the different kinds of “costs.”
There are operating costs, sunk costs, opportunity costs, etc. Opportunity costs are the costs that are never spent. The opportunity cost is the “cost” (as a lost benefit) of the forgone products/services after making a choice among alternatives. That’s a mouth full. In other words, an opportunity cost is the value of something you have given up (not chosen) as a result of choosing something else. The “value” can be measured in dollars, degree of effort, or may be considered “priceless.”
When my wife, Sue, goes shopping for a new outfit, very often she will return not having purchased one. She will describe an outfit that she really liked but decided it was too expensive. She will go back the following week hoping that the price is reduced only to find that the item was sold. The opportunity cost in that situation is “priceless” because she never got the outfit she wanted. Her choice saved us the cost of the product, but she gave up her owning the outfit, which is hard to value.
Some argue that you can’t have opportunity costs unless you make a decision among alternative choices. Ordinarily, I would agree. However, in our current state of affairs, we seem to be seeing a multitude of Opportunity Costs because of the decisions that aren’t being made.
Our Illinois House of Representatives, after weeks of delay, debate, and rejection of reforms to the nation’s worst-funded state pension system, finally voted to place a cap on pensions. If upheld through the political system, it would put a ceiling on the salaries used to calculate pensions for retired state workers to what is called the Social Security wage base, now at $113,700, adjusted annually for inflation.
At the same time, they rejected measures that would place a temporary freeze on cost of living increases or require that workers contribute toward their pensions. Their lack of making decisions on pension reform is increasing the pension opportunity costs that we, the taxpayers, need to fund in the future. We elected these officials to make decisions on our behalf. So far, their lack of decision-making is costing us more bucks. I wish they would leave lower opportunity costs on the table and earn their pay.
• Send your questions and ideas to: Sun Day, Frugal Forum Column, P.O. Box 7505, Algonquin, IL 60102, or, by email to: thefrugalforum@gmail.com
