Managerial Accounting: Sunk Costs Associated with a Decision

Managerial Accounting for Managers
Author’s Name
Institutional Affiliation
Course Code and Name
Professor’s Name
Date

Managerial Accounting for Managers
Sunk costs are funds that have been spent in a business and cannot be recovered. In particular, it is independent of the event that occurred and should not be considered in future investment decisions. I disagree with the statement, “Sunk costs are easy to spot – they’re the fixed costs associated with a decision.”
Although sunk costs might be spotted easily, they do not determine future decisions of a firm and should be ignored since they are funds that cannot be recovered. Besides, not all fixed costs can be considered sunk costs. Sunk costs can be more than fixed costs (Arque-Castells & Mohnen, 2015). For instance, a company can purchase equipment, a fixed cost. The equipment might be rendered useless, which means that it falls under the category of sunk costs. However, if it is returned or resold at a particular determined price, the firm recovers some of the money used to buy the equipment.
One fundamental economic principle is that sunk costs are irrelevant to rational decision-making. When managers become influenced by sunk costs in the decision-making process, they are said to have committed the “sunk cost fallacy” (Kramer, 2017). Specificall...