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CMA Foundation · Fundamentals of Financial and Cost Accounting · Meaning and Significance of Cost Accounting and its Relationship with Financial Accounting

A company evaluating whether to continue making a component notes that ₹5,00,000 was spent last year on a machine now fully obsolete. In the decision, this ₹5,00,000 is best described as:

The ₹5,00,000 is a sunk cost and is irrelevant to the decision. It was already incurred in the past and cannot be changed by any future choice, so it does not differ between alternatives. Only future, differing costs and revenues matter.

  1. ASunk cost, irrelevant to the decisionCorrect
  2. BOpportunity cost, relevant to the decision
  3. CDifferential cost, relevant to the decision
  4. DControllable cost of the current manager

Explanation

Money already spent that cannot be recovered by any future action is a sunk cost. It does not differ between alternatives, so it is irrelevant for the decision. Opportunity cost is the benefit forgone from the next best alternative, and differential cost is the difference between alternatives, so neither fits.

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