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

Mehta Textiles bought a machine last year for Rs 8,00,000, which is now obsolete and cannot be sold. While deciding whether to buy a new machine, the Rs 8,00,000 is best described as which type of cost?

It is a sunk cost. The money was already spent in the past on the machine and cannot be recovered or altered by any future choice, so it does not affect the decision about buying a new machine.

  1. AOpportunity cost
  2. BSunk costCorrect
  3. CMarginal cost
  4. DAvoidable cost

Explanation

The Rs 8,00,000 was spent in the past and cannot be recovered or changed by any future decision. Such a cost is a sunk cost and is irrelevant to the decision. Opportunity cost would require a forgone alternative benefit, which does not exist here as the machine has no resale value.

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