Sunk Cost Vs Opportunity Cost: What's The Difference?

It is important to note that while all sunk costs are fixed costs, not all fixed costs are sunk costs. 

Sunk costs are, by definition, those which cannot be recovered by any means. Some previously incurred costs can be sold on for their purchase price and therefore are not considered sunk.

An Opportunity Cost is the loss of other alternatives when one option is chosen or no action is taken. Opportunity costs are unseen, not included in financial reports, and can often be forgotten about in capital budgeting. Part of the reason opportunity costs are unseen is because they consider Implicit Costs.

An implicit cost is any cost that has already occurred but is not necessarily shown or reported as a separate expense. These costs are much harder to measure as they are not always quantitative. Being aware of trade-offs will allow managers to make better-educated investment decisions.

The main challenge with opportunity costs is that they are hard to accurately calculate. Returns on investments are often estimated rather than hard-set figures.

It is also not always easy to define non-monetary factors like risk, time, skills, or effort. This is not to say trade-offs should not be estimated and considered in business decision-making, but rather that it is only after a choice has been made that managers will have the hindsight to see how each investment decision is compared.

Meaning

• Sunk costs have already been incurred and cannot be recovered by any means
• Opportunity costs represent forgone returns of alternative opportunities

Implicit or Explicit

• Sunk costs are explicit as they are the result of actual cash flows
• Opportunity costs are generally implicit as they are notional in nature and do not come in the form of cash outflow

Estimation of Cost

• Sunk costs can be accurately estimated as they have actual purchase prices that have been incurred
• Opportunity costs are harder to estimate as they are often notional and their value is more subjective.

Reporting

• Sunk costs have already been paid for and are reflected on balance sheets and financial statements
• Opportunity costs are not shown on financial statements, though they may be included in managerial reports

Role in Decision Making

• Sunk costs have already been incurred and are therefore no longer relevant to future business decisions
• Opportunity costs are very important to future business decision-making as they represent the potential benefits a business misses out on when choosing one alternative over another.