What defines a sunk cost?

What defines a sunk cost?

• A. A cost that is forecasted for future expenses
• B. A cost that has already been incurred
• C. A cost that varies with production
• D. A cost that can be recovered in the future

Answer: (B)

A sunk cost is defined as a cost that has already been incurred and, therefore, cannot be recovered. This concept is crucial in decision-making processes because it focuses on the costs that will not impact future financial decisions. Understanding sunk costs helps individuals and organizations avoid the "sunk cost fallacy," which can lead to poor decision-making based on past expenditures rather than future benefits or costs. In the context of the question, the other types of costs mentioned have distinct definitions. Forecasted costs refer to anticipated expenses that have not yet occurred, which is not applicable here. Costs that vary with production are known as variable costs, affecting financial outcomes based on production levels but do not relate to costs that cannot be recovered. Lastly, recoverable costs imply that there exists a possibility of regaining the expense in the future, which contradicts the very nature of sunk costs. Thus, option B correctly captures the essence of what defines a sunk cost.

A sunk cost is defined as a cost that has already been incurred and, therefore, cannot be recovered. This concept is crucial in decision-making processes because it focuses on the costs that will not impact future financial decisions. Understanding sunk costs helps individuals and organizations avoid the "sunk cost fallacy," which can lead to poor decision-making based on past expenditures rather than future benefits or costs.

In the context of the question, the other types of costs mentioned have distinct definitions. Forecasted costs refer to anticipated expenses that have not yet occurred, which is not applicable here. Costs that vary with production are known as variable costs, affecting financial outcomes based on production levels but do not relate to costs that cannot be recovered. Lastly, recoverable costs imply that there exists a possibility of regaining the expense in the future, which contradicts the very nature of sunk costs. Thus, option B correctly captures the essence of what defines a sunk cost.