Asked by Cassandra Lorenzo on Apr 26, 2024
Verified
Which of the following statements best describes a sunk cost?
A) A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
B) A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
C) A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
D) A sunk cost is any cost not directly related to the physical work required to complete the project.
Operation
In a business context, operation refers to the day-to-day activities necessary for running a company, which can include production, distribution, and the provision of services.
Sunk Cost
An expense that has already been incurred and cannot be recovered, which should theoretically not influence any future financial decisions or strategies.
Expensed
The act of charging costs to expense accounts, recognizing them in the income statement in the period they were incurred.
- Differentiating sunk costs from relevant costs in the assessment of projects.
Verified Answer
TD
Tyler DeShieldsApr 30, 2024
Final Answer :
C
Explanation :
A sunk cost is defined as a cost that has already been incurred and cannot be recovered. Therefore, option C, "A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project," is the best description of a sunk cost. Option A is incorrect because it defines a cost that must be expended in order to complete a project, which is not necessarily a sunk cost. Option B is incorrect because it describes a cost that can be recovered, which is not applicable to sunk costs. Option D is incorrect because it describes a cost that is not directly related to the physical work required to complete the project, which is not necessarily a characteristic of sunk costs.
Learning Objectives
- Differentiating sunk costs from relevant costs in the assessment of projects.