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CMA Foundation · Fundamentals of Financial and Cost Accounting · Classification of Costs (CAS 1)

Bharat Textiles bought a machine last year for Rs 8,00,000, which is now fully paid. The management is now deciding whether to replace it with a newer model. In this decision, the Rs 8,00,000 paid earlier is best described as which type of cost?

The Rs 8,00,000 already paid for the machine is a sunk cost. It was incurred in the past and cannot be changed by the replacement decision, so it is irrelevant to the choice. Only future costs and revenues that differ between the alternatives matter.

  1. ASunk costCorrect
  2. BOpportunity cost
  3. CMarginal cost
  4. DAvoidable cost

Explanation

A cost already incurred in the past that cannot be recovered or changed by any future decision is a sunk cost. The Rs 8,00,000 has been paid and no replacement choice can alter it, so it is irrelevant to the decision. An avoidable cost could be saved by a decision, which does not apply here.

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