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Role of sunk cost in decision making

Nikhil Sharma (Student) (46 Points)

14 October 2013

On page number 1.22 in IPC Cost accounting book Volume I The meaning of sunk cost is clear but it is written that sunk costs do not play any role in decisions relating to the current period and an example about the same is given that during replacemnt of a machine the written down value of the existing machine is a sunk cost and thus, not considered. But the cost is considered because of the importance of the realisation value of the machine.

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2 Replies

CA Pallav Singhania (IT System Auditor) (33362 Points)
Replied 14 October 2013

A sunk cost is a payment that can't be recovered; it's already been done and its not refundable. They're irrelevant in making decisions about future actions for that reason; whether you want to or not, you can't reverse that cost.

For example, when a car is purchased, it can subsequently be resold; however, it will probably not be resold for the original purchase price.

regards,

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CA Rajat Bajaj (Job) (1042 Points)
Replied 14 October 2013

The sunk cost is the cost which does not affect our decision regarding (1) to do work or not to do and (2) if we do, which alternative should we select among the alternative available. Means the cost which always occur either you accept offer or not, is sunk cost. E.g. Depreciation, factory rent, manager's salary etc. If u do not accept the offer then also this will occur or you accept then also this would occur, so it has no relevance in decision making.