sunk cost

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Sunk Costs

Money that has already been spent. Sunk costs are important because a company may use, for example, an old piece of equipment to make a new product. In this case, sunk costs are positive because no further investment is required. On the other hand, a sunk cost may be negative; for example, that old piece of equipment may break down after its warranty has expired. This means that the owner will not recover the costs no matter what happens.

sunk cost

A past outlay or loss that cannot be altered by current or future actions.

sunk cost

the cost of durable and specific assets such as plant and machinery which cannot be used for other purposes or easily be resold. Where sunk costs represent a high proportion of a firm's total costs the firm may be ‘locked in’ to its existing products and markets, the sunk costs forming a BARRIER TO EXIT from the market. Since such specific assets have little alternative use they have no OPPORTUNITY COST and so naturally should not enter into management decision-making. Consequently in MAKE-OR-BUY DECISIONS the firm need not consider the sunk costs involved in making products but only the additional production costs as opposed to buying from outside suppliers.
References in periodicals archive ?
Approximately 85% of the total project costs have been committed and the cumulative total for these committed costs is on budget
It is common to define committed costs in terms of previous contractual obligations and the capacity to provide service.
Marginal costing ignores cash flows that won't be affected by a proposal, since they are deemed irrelevant, but this can take a naive view of prepaid sunk costs or future committed costs when applied to short-term decisions, since firms must cover all their costs in the medium to long term to make a profit.
Over the past week, in-depth examinations of the budget over several years have shown some rolling committed costs of pounds 2.
Goldratt (1990a) argues extensively that labor and over-head costs are committed costs and are irrelevant for resource allocation decisions.
Completion of the implementation process, Phase III, consists of the recording of accounts payable vouchers at the property site and the ability to record and track committed costs at the budget line-item level.
By comparing real-time, actual and committed costs, versus those tied to projected future activities, manufacturers gain a significant bottom-line operational advantage and fewer surprises at quarterly financial closes.
Discovery Minerals has a total of $450,000 committed costs to assess and develop the property known as the Turquoise Mountain Project.
This feature provides developers with real-time budget visibility to track unapproved invoices and compare committed costs against existing budgets for streamlined reporting of expenditures.
Additional support for the rating includes the member systems' 1996 reaffirmation to pay all of GTC's committed costs via joint and several take-or-pay commitments, extending through the year 2025, and the member systems solid financial position.
The PRISM Software Suite is designed for "single-source" data entry to ensure data integrity and is easily linked to corporate financial systems for downloading actual and committed costs and to commercial estimating, planning and scheduling software for integrating costs with project schedules and resources.