Question

Explain what a sunk cost is. Are sunk costs relevant in decision making? Why or why not?

Answer 1

Costs which are incurred by the business organisation that cannot be recovered in the present or future are known as sunk cost. ie. Expenditure is spent by the business organisation but the amount spent cannot be recovered by any means.

Because the sunk cost cannot be recovered, so they are considered irrelevant for decision making process. The decisions will not be affected because the expenditure (ie. Sunk cost) cannot be recovered and is excluded for the decision making process. Sunk cost cannot affect the decision making in anyway so there excluded while making decisions.