Learn more about moneyandinvestments with this collection
The impact of opportunity cost on personal and professional life
Evaluating the benefits and drawbacks of different choices
Understanding the concept of opportunity cost
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.
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MORE IDEAS ON THIS
Reporting
Role in Decision Making
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Meaning
Implicit or Explicit
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One trap managers should be aware of when it comes to sunk costs is the sunk cost fallacy. The Sunk Cost Fallacy describes our tendency to follow through on an endeavor if we have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits.
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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 sa...
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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 becaus...
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A sunk cost refers to a cost that has already occurred and has no potential for recovery in the future. Given that sunk costs have already occurred, the cost will remain the same regardless of the outcome of a decision, and so they should not be considered in capital budgeting.
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CURATED FROM
IDEAS CURATED BY
Sunk Costs are explicit and appear on financial statements so it is understandable why these costs are honed in on. Opportunity Costs are implicit and unseen, so they are often overlooked.
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