What is Sunk Cost? Is Sunk Cost relevant in making decisions?

Sunk costs: Costs which do not change under given circumstance and do not play any role in decision making process are known as sunk costs. They are historical costs incurred in the past. In other words, these are the costs which have been incurred by a decision made in past and cannot be changed by any decision made in the future.

Sunk cost is a historical cost incurred in the past. In other words it is a cost of a resource already acquired. Future decisions in respect of this resource will not be affected by it.

For example, book value of machinery. Hence sunk costs are irrelevant in decision making. Irrelevant costs are not necessary sunk costs. For example, when a comparison of two alternative production methods using the same material quantity is made, then direct material cost is not affected by the decision but this material cost is not sunk cost.

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