Common examples include rent, insurancesalaries and interest. There is a difference between the cost accounting definition and the financial accounting definition.
To make an informed decision, a business only considers the costs and revenue that will change as a result of the decision; sunk costs that do not change are not considered. Factoring in a Sell-or-Process-Further Decision A manufacturing firm may have a number of sunk costs, such as the cost of machinery, equipment, and the lease cost of a factory.
Sunk costs are excluded from a sell-or-process-further decision; this concept applies to products that can be sold as they are or can be processed further. The cost of the factory lease and the machinery are both sunk costs and are not part of the decision-making process.
Examples of Eliminated Sunk Costs If a sunk cost can be eliminated, the cost becomes a relevant factor and should be a part of business decisions about future events. If, for example, XYZ Clothing is considering shutting down a production facility, any of the sunk costs that have end dates should be included in the decision.
To make this decision, XYZ Clothing considers the revenue that would be lost if production ends and the material and labor costs that are eliminated. If, however, the factory lease ends in six months, the lease cost is no longer a sunk cost and should be included as an expense that can be eliminated.
If the total costs are more than revenuethe facility should be closed.Examples of Sunk Costs.
Here are several examples of sunk costs: Marketing study. A company spends $50, on a marketing study to see if its new auburn widget will succeed in the marketplace.
The study concludes that the widget will not be profitable. At this point, the $50, is a sunk cost.
Oct 01, · For example, when a car is purchased, it can subsequently be resold; however, it will probably not be resold for the original purchase price. The Status: Resolved. Oct 01, · Best Answer: Sunk costs are costs which cannot be recovered once they have been incurred.
Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action, and prospective costs which are costs that will Status: Resolved.
In fact, the level of sunk cost is a major barrier to entry to many of these businesses. The concept is simple and straightforward, but sunk cost plays a major role in many personal and business.
Sep 04, · This video explains what a sunk cost is and provides examples to illustrate why sunk costs should be irrelevant to decision-making. Edspira is your source for business and financial education. Solutions to Sunk Costs Problems. 1. Here is a standard example used to present the sunk-cost fallacy: Three months ago, your eight-year-old car suddenly required serious repairs.