Course Outline
Join PRO

What is a sunk cost?

Harold Averkamp, CPA, MBA

Definition of Sunk Cost

A sunk cost is a cost that was incurred in the past and cannot be undone. Since most transactions cannot be undone, most amounts spent in the past are sunk. A past or sunk cost will be there regardless of what is decided today or in the future. Expressed another way, since we cannot undo the past, every decision will affect only today and/or the future. As a result, the relevant costs and benefits for making a decision are the current and future costs.

Unfortunately, we do not find the future costs in a company’s general ledger. At best, those past/sunk costs may help us determine the relevant current and future costs and potential income tax benefits.

Example of a Sunk Cost

Assume that a year ago a company spent $100,000 to purchase and install a new machine. Today, a robot became available for $80,000 and it is expected to reduce expenses by $50,000 in each of the next 10 years. Today, the one-year-old machine can be sold for just $10,000. In the decision whether to purchase the robot, the $100,000 spent on the one-year-old machine is a sunk cost.

Ignoring any income tax consequences, what is relevant for the decision on purchasing the robot is whether to spend an additional $70,000 today (the $80,000 cost of the robot minus the $10,000 to be received from the old machine) in order to save $50,000 each year for 10 years. It may be difficult to accept that $100,000 was spent a year ago, but spending an additional $70,000 today to earn (reduce expenses) $50,000 each year for 10 year is really a simple decision.

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews



PRO Plus

Lifetime Access (One-Time Fee)
Word Scrambles
Bookkeeping Video Training
Financial Statements Video Training
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on

Learn More About Harold

Certificates of

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus