2017-03-01 00:00:00Decision MakingEnglishGrasp the concept of sunk costs, and understand why these expenses should left out of the decision-making process when working on projects.https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Designer-Reviews-The-Sunk-Cost-From-His-Fall-Collections-Production.jpghttps://quickbooks.intuit.com/ca/resources/decision-making/what-are-sunk-costs/What Are Sunk Costs?

What Are Sunk Costs?

1 min read

Sunk costs are expenses that have already been paid. Since they have already been incurred, it’s impossible for a business to plan around them or keep them from happening. For example, assume that a company paid for its next month of rent. If this is nonrefundable, the costs are sunk; there’s no way the company can recuperate these charges. When attempting to decide between a few alternatives, it is important to disregard sunk costs. These charges don’t have an impact on any decision you make, so they shouldn’t be factored into the decision. For instance, if the company above is thinking about moving to another office location, it shouldn’t factor in the fact that its next month of rent has already been paid. The rent has been paid no matter whether the company stays or goes, and it has the same financial impact on either option. This concept is especially important when making big decisions or embarking on large projects. Imagine that your small business is expanding its product line. To date, it has paid $10,000 to develop a new good, and it expects to pay an additional $8,000. If you had to decide whether to scrap the new product, your decision should be based on whether to spend the additional $8,000. The $10,000 has already been paid and is a sunk cost. Regardless of what you decide to do, you will have spent the $10,000 either way.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Don't Fall Victim to Decision Traps

Decision making would be a challenging task even if people could be…

Read more

Cost Accounting: Prime Costs vs. Conversion Costs

If your company makes and sells products, it is important to track…

Read more

What Types of Costs: Actual, Budgeted, or Standard?

If your clients make products, you may need to help them with…

Read more