Sunk Cost:
A sunk cost is an expenditure that has been incurred and cannot be recovered. All past or actual costs are regarded as sunk costs. However, sunk cost also includes an expenditure that has to be made in future under a binding contractual agreement. As the sunk cost cannot be recovered, it is ‘irrelevant’ for decision making.
image source: i.ytimg.com
Sunk cost does not vary with the changes in business activity contemplated for future by the management. The amortization of past expenses (e.g. depreciation) and expenditure on highly specialised equipment designed to order for a plant (that can neither be sold to any other firm nor can be used for any alternative purpose) are examples of sunk costs. Thus, sunk costs are unavoidable costs or uncontrollable costs. These does are often ignored by the economists but taken into account by the accountants.
Future Cost:
ADVERTISEMENTS:
Future cost is based on forecasts. It is ‘relevant’ for most managerial decisions which are generally forward looking. Future costs involve forecasting for control of expenses, appraisal of capital expenditures, decisions on new projects as well as expansion programmes and profit-loss projections through proper costing under assumed cost conditions. Policy decisions on pricing also depend upon future costs.
Future costs may need expenditure on fixed or variable factors. Additions to costs emanating from a change in the nature and level of business activity (incremental costs) are future costs. As these costs are incurred when the business activity is changed (change in product line, addition or replacement of a machine, changes in distribution channels, etc.) and can be avoided by not bringing about the change, these incremental costs (differential costs) are also called avoidable costs or escapable costs or controllable costs or discretionary costs.