What is the interest cost of an organization's own funds

Solution

Notional cost is any imaginary cost that have been included in the cost for decision making purposes. But opportunity cost is NOT just any imaginary cost. Opportunity cost arises only when one course of action has been selected and because of that benefits that were available under other alternatives have been foregone In simple words all opportunity costs are notional costs but not all notional costs are opportunity costs. Let’s understand it with an example. Company owns a piece of land and have used it to install a production machinery on it. Now every unit that is being produced will not have rental cost included in it as company is not incurring any cost towards rent. But if company wants to compare its product’s performance with the one of its competitor’s product and if that competitor is incurring a rental cost then to make the comparison “fair” then company might add an imaginary rental cost in the production cost. As this is mere imagination and company is not actually incurring any cost towards rent thus the name notional which also means imaginary. Opportunity cost will only arise and will be included in the cost of production when company had the option to rent out the land and someone was willing to pay the rent as well i.e. company had the second alternative of letting it instead of using it for production purposes then such notional rental cost (that is equivalent of expected rent that can be earned by renting out this land) will be an opportunity cost as well.