Cost is the sum total amount which a person has to pay in order to buy something. In simple words, it is the total expenditure which a person spends in the given period of time. Usually in business terms, cost is a monetary worth of effort, material, available resources, time and utilities, risk incurred, opportunity cost and finally of delivery of good and services. Copy the link given below and paste it in new browser window to get more information on Sunk Cost:- http://www.transtutors.com/homework-help/accounting/sunk-cost.aspx

2. OTHER NAMES
• Prior year cost
• Sunk capital
• Embedded cost
• Retrospective cost
• Stranded cost

3. Sunk
cost
Independent
of future costs
Cannot be
recovered
Incurred in
past

4. EXAMPLES
1. Marketing study
2. Hiring bonus
3. Research & development
4. Training

5. OPPORTUNITY COST
• Value of choice which is not chosen
• The next best alternative cost available
• Which a person sacrifices when he choses the other cost
over another
• Plays crucial role in the capital budgeting decisions
• Types - implicit costs and explicit costs

7. SUNK COST FALLACY
• A trap which enables a investor to invest more in the
sunken cost to earn profit
• Describes the emotional difficulty attached with the
investment
• Give rise to the sunken cost dilemma

8. EXAMPLE OF SUNK COST FALLACY

9. SUNK COST BIAS
• A thinking trap
• Expecting something from sunk investment
• A long term relationship which we don’t want to abandon
as lot of money and time invested in it

10. HOW TO AVOID IT?
• Quickly admit mistakes and try to take pride in
recognizing the costs
• Focus on current course of action
• Take care of long term objectives
• Should not waste resources on bad move

11. CALCULATION OF SUNK COST
F O R A
E Q U I P M E N T F O R A P R O J E C T
• First of all identify all
equipment that can be
salvaged in the project. It
includes tools and
equipment that can be
resold.
• Now calculate the sunk cost
for salvaged equipment.
• Calculate the cost of non-
salvaged equipment.
(Purchase price of
equipment – depreciation)
• Total cost of labor that is
used in the project up to
the date.
• Sunk cost for the project is
the sum total of equipment
sunk cost, cost of
equipment that cannot be
salvaged and the cost of
labor.
Compare the new price
of each object based on
its make, model and
serial number with the
equipment to be
replaced
Find the relizable salvage value
of each product.
subtract the present realizable
salvage value from the book
value.

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