Sunk costs

Sunk costs

Sunk costs refer to expenses that entities incur and which they can no longer recover in any way. They are also known as stranded costs. Sunk costs are not considered as relevant costs in the differential analysis because they cannot be retrieved. They represent all revenues spent by an organization and are considered as non-factors in the subsequent budgets. For instance, if a business owner decides to shut down the business because it makes losses, it does not mean that the person will get the lost money back. Instead, it means that the business will no longer lose additional money.

Various examples can be used to illustrate the concept of sunk costs. The first example, consider a bakery that spends $50000 in making bread and an additional 20000 in promoting the products. Unfortunately, customers do not like the bread, and only $15000 worth of revenues are obtained from the sale of the product. The other part of the budget that does not get recouped is a sunk cost, and the possibility of the losses should be factored into the budget of different products in the bakery even before the losses occur. Another example of sunk costs is in a hospital that spends $40000 in training the subordinate staff on how to integrate the use of technological devices into their daily operations. The devices prove inefficient in most of the operations done by the members of the subordinate staff, and the board of management decides to discontinue the use of technological equipment by all subordinate staff. The training is considered a sunk cost and thus should not be factored into any decision that relates to the technological devices.