What is the Difference Between Sunk Cost and Relevant Cost?
🆚 Go to Comparative Table 🆚The main difference between sunk cost and relevant cost lies in the timing of their occurrence and their impact on decision-making.
Sunk Cost:
- Sunk costs are expenses that have already been incurred and cannot be recovered.
- They are a type of irrelevant cost, as they do not influence managerial decision-making since they have already been incurred and cannot be reversed or recovered.
- Sunk costs are a subset of fixed costs, specifically a type of fixed cost that is not recoverable.
Relevant Cost:
- Relevant costs are future costs that will be incurred as a result of a decision made in the present.
- They are only considered in managerial decision-making, as they will be affected by the specific management decision being made.
- Relevant costs are used to determine factors such as whether to sell or keep a business unit, whether to make or buy parts or labor, and whether to accept a customer's last-minute or special orders.
In summary, sunk costs are past expenses that cannot be recovered and are not considered in decision-making, while relevant costs are future costs that will be incurred as a result of a present decision and are considered in managerial decision-making.
Comparative Table: Sunk Cost vs Relevant Cost
Here is a table comparing the differences between sunk costs and relevant costs:
| Feature | Sunk Costs | Relevant Costs |
|---|---|---|
| Definition | Sunk costs are expenses that have already been incurred and cannot be recovered. | Relevant costs are costs that will be affected by future decisions and may influence managerial decision-making. |
| Timing | Incurred in the past. | Incurred in the future as a result of a decision made presently. |
| Influence on Decision-Making | Sunk costs should not be considered when making decisions about a firm's future, as they are irrelevant to future cash flows. | Relevant costs should be considered in managerial decision-making, as they impact and influence management decisions. |
| Example | A company has spent $10,000 on research and development for a new product. The $10,000 is a sunk cost and should not be included in future decision-making. | A company is considering whether to invest in a new machine. The costs associated with purchasing, maintaining, and operating the machine are relevant costs to consider when making the decision. |
It is important for businesses to recognize the difference between sunk costs and relevant costs when making decisions. Considering sunk costs in decision-making can lead to irrational decisions, while taking relevant costs into account helps in making more informed choices.
- Fixed Cost vs Sunk Cost
- Relevant vs Irrelevant Cost
- Sunk Cost vs Opportunity Cost
- Price vs Cost
- Actual Cost vs Standard Cost
- Tangible vs Intangible Cost
- Cost Benefit vs Cost Effectiveness
- Cost vs Expense
- Annuity vs Sinking Fund
- Variable vs Fixed Costs
- Costing vs Cost Accounting
- Avoidable vs Unavoidable Cost
- Opportunity Cost vs Marginal Cost
- Historical Cost vs Fair Value
- Costing vs Budgeting
- Controllable vs Uncontrollable Cost
- Job Costing vs Contract Costing
- Financial Accounting vs Cost Accounting
- Sinking Fund vs Amortization