Sunk Cost, Opportunity Cost, and Accounting Cost

Sunk Cost, Opportunity Cost, and Accounting Cost

Describe sunk cost, opportunity cost, and accounting cost, and give examples of each. What role does each play in decision-making? (3–4 paragraphs)

Sunk costs are costs that have been incurred previously, and present or future decisions will not change that fact (Weygandt, 2010). Sunk costs are not included in future business decisions since the cost will always be the same no matter what the outcome of the decision is. Management consider future cost and revenue that are relevant costs when making business decisions. The costs could change due to the result of such business decisions, but sunk costs that do not influence change are not taking into consideration. Although, if a sunk cost can be eliminated, the cost becomes a relevant factor and should be a part of business decisions about future events (Kenton, 2018). Examples of sunk costs would include employee training, hiring bonus, research and development, and market studies. Sunk costs are only part of the decision making process is they can be eliminated, such as a business closes down but the lease does not end for three months. In this case, the sunk cost would be recorded as an expense.

Opportunity costs are different than a sunk cost. The difference is the difference between money already spent and potential returns no earned on an investment because the capital was invested elsewhere ( Kenton, 2019). Opportunity cost is the benefit that you could have received as a result of choosing one course of action over another. Managers must be able to understand the possibilities of each opportunity in order to choose the one that offers the best return. No matter which option the business chooses, the potential profit it gives up by not investing in the other option is the opportunity cost (Kenton, 2019). An example of opportunity cost would be choosing to hire an employee for $60,000, instead of using that money for marketing purposes. The difference between the two choices is the foregone opportunity