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SUNK COST
THE COST W
H ICH I S
SPENT IN
THE PAST AND C
ANNOT BE
RECOVERED IN THE PAST.
OTHER NAMES• Prior year cost• Sunk capital• Embedded cost• Retrospective cost• Stranded cost
Sunk
cost
Independent of future
costs
Cannot be recovered
Incurred in past
EXAMPLES1. Marketing study2. Hiring bonus3. Research & development4. Training
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
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
EXAMPLE OF SUNK COST FALLACY
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
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
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.
Hey Friends,
This was just a summary on Sunk Cost. For more detailed information on this topic, please type the link given below or copy it from the description of this PPT and open it in a new browser window.http://www.transtutors.com/homework-help/accounting/sunk-cost.aspx