Sunk costs

We focus on sunk costs, a key concept in managerial decision-making. Sunk costs are expenditures already incurred and cannot be recovered, no matter what choices are made later. Since they are unchangeable, they are irrelevant to new decisions. However, individuals and organizations often fall into the “sunk cost fallacy,” letting past costs wrongly influence present decisions. Recognizing this bias is crucial to improving decision-making and avoiding costly mistakes. Decision-making should focus on relevant information—expected future costs or revenues that will differ depending on the chosen alternative. Sunk costs, by definition, cannot be changed by any future action. Whether a company continues or discontinues a project, the funds already spent are gone. For example, if a firm invested heavily in an unviable product, it may be tempting to persist to justify past spending. Rational managers compare only future costs and benefits, recognizing that sunk costs are no longer relevant. Ignoring them helps avoid emotional decisions that could derail long-term goals. Let’s consider how sunk costs appear in managerial accounting scenarios. Imagine a company evaluating whether to accept a special sales order, discontinue a product, or outsource production. The key is determining which costs are relevant. Past expenditures, like the price paid for a machine or initial research investment, are sunk