Statement – I : Costs which do not take the form of cash outlays, nor do they appear in the accounting system are known as opportunity costs.
Statement – II : Costs in the form of depreciation allowances and unpaid interest on the owner's own funds are known as sunk costs.

Question

Prepp Team · Accepted Answer

Statement I Analysis: Opportunity Costs

Statement I correctly defines opportunity costs. These are costs that represent the value of the next best alternative foregone. They often do not involve direct cash outlays and might not be explicitly recorded in the accounting system, as they represent potential benefits missed rather than actual expenditures.

Statement II Analysis: Sunk Costs

Statement II incorrectly identifies depreciation allowances and unpaid interest on the owner's own funds as sunk costs.

Sunk Costs: Costs that have already been incurred and cannot be recovered are sunk costs.
Depreciation Allowances: These are accounting provisions reflecting the reduction in an asset's value over time. While related to past expenditures, the allowance itself is an accounting entry, not typically classified strictly as a sunk cost in this context, and it does appear in the accounting system.
Unpaid Interest on Owner's Funds: This represents the opportunity cost of using the owner's equity instead of borrowing capital. It is the potential return foregone by not investing the funds elsewhere. It is not a sunk cost because it hasn't necessarily been incurred and cannot be recovered; rather, it’s a measure of alternative return missed.

Therefore, Statement II is incorrect as it mischaracterizes these cost types.