Sunk costs are irrelevant,but irrelevant costs are not sunk

Nancy (Article) (243 Points)

17 April 2010  

I am not able to understand meaning of following question, please help me in understanding with some more examples

Question 5 (c) of November 2009-Old Course -“Sunk costs are irrelevant in decision-making, but irrelevant costs are not sunk cost.”Explain with examples.

Answer by Suggested answers: The sunk cost is one for which the expenditure has taken place in the past. This cost is not affected by a particular decision under the consideration. Sunk costs are always results of decision taken in past. Investment in plant and machinery as soon as installed, its cost is sunk cost and is not relevant for decision making. The relevant cost is a cost appropriate in adding to make specific management decisions. A relevant cost is a future cost which differ with alternatives and one which is expected to be incurred and not a sunk cost which has already been incurred. If the cost remain constant between different alternatives, treated as irrelevant cost however that is not a sunk cost. Sunk costs are based on past, always irrelevant for decision making. Relevant cost must be an incremental or avoidable cost. For example fixed over heads which are allocated by head office are not relevant, but incremental or avoidable fixed overheads are relevant.