Question

How does one determine what a sunk cost is?

Answer 1

Sunk cost is the cost which has already been incurred by the business and cannot be recovered by the Business. Thus, those costs which have already been spent and which cannot be received back by the Business are determined as Sunk Cost.

For the purpose of determining the sunk costs of a business, those costs which have been spent by the business with no probability of receiving back are considered, hence, costs like Rent, amount spent on Recruitment and Training of employees who subsequently leave the organization, Cost of Plant & Machinery which becomes redundant, cost of equipment which becomes redundant, cost incurred for market mapping which proves to be unprofitable, cost incurred on advertising which generates no extra income, cost of repairs and maintenance which do not yield any additional income are all determined as Sunk Cost.

Since, the sunk cost do not change, hence, the sunk cost are excluded by the management while taking any business decision and the decisions are taken on basis of other costs which are relevant to the Business.