What defines a sunk cost?

A sunk cost is defined as a cost that has already been incurred and cannot be recovered. This is significant in decision-making processes because sunk costs should not influence future decisions. Recognizing a cost as a sunk cost implies that it is no longer relevant to the current decision-making context since it cannot be altered regardless of future actions. For example, if a company has spent money on research that cannot be recouped, that expense should not factor into whether the company decides to proceed with a new project or not.

The other options relate to different types of costs. For example, recoverable costs suggest that there is still a chance to get the money back if the decision changes, which does not apply to sunk costs. Costs related to future investments imply ongoing or prospective expenditures, but these are different from costs already incurred. Lastly, temporary expenses denote costs that are short-lived or variable, whereas sunk costs are definitive and long-standing. Understanding the nature of sunk costs is crucial for making informed business decisions without letting past expenditures cloud judgment.