“Sunk cost is irrelevant in decision-making, but irrelevant costs are not sunk costs”. Explain with example.

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Sunk costs are costs that have been created by a decision made in the past and that cannot be changed by any decision that will be made in the future. For example, the written down value of assets previously purchased are sunk costs. Sunk costs are not relevant for decision making because they are past costs. 

But not all irrelevant costs are sunk costs. For example, a comparison of two alternative production methods may result in identical direct material costs for both the alternatives. In this case, the direct material cost will remain the same whichever alternative is chosen.

In this situation, though direct material cost is the future cost to be incurred in accordance
with the production, it is irrelevant, but, it is not a sunk cost.

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