What Is a Sunk Cost?
Why money already spent should not drive your next decision.
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| Decision relevance | Irrelevant |
|---|---|
| Not the same as | Opportunity cost |
| Topic | Management accounting · Decision making |
Sunk cost in plain English
Only future costs and benefits that differ between options matter. A cost already paid is gone either way, so it cannot help you choose. The mistake of letting it influence you is called the sunk cost fallacy.
Worked example
A company spent 10,000 on a feasibility study for a new product. It must now decide whether to launch. Going forward, the launch is expected to cost 40,000 and bring in 35,000.
The 10,000 study is a sunk cost and is ignored. Looking only at the future: 35,000 − 40,000 = 5,000 loss. The launch should not go ahead, even though that “wastes” the study.
- Continuing a failing project “because we have already invested so much”.
- Including past spending when comparing future options.
Frequently asked questions
What is the difference between sunk cost and opportunity cost?
A sunk cost is money already spent. An opportunity cost is the value of the best alternative you give up by choosing an option.
Is a sunk cost the same as a fixed cost?
No. A fixed cost may still be avoidable in the future. A sunk cost cannot be recovered whatever you decide.
Why should sunk costs be ignored?
Because they do not change with the decision, so they give no reason to prefer one option over another.
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This page is for general learning. Accounting rules vary by country and standard.