It refers to any expenditure incurred by a
firm or an individual.
Profit maximization & cost minimization is
main objective of the firm.
“Cost” concept helps in choosing the
alternative which satisfies the above
In economics and business decision-making, sunk
costs are retrospective (past) costs that have
already been incurred and cannot be recovered.
Sunk costs are sometimes contrasted with
prospective costs, which are future costs that
may be incurred or changed if an action is taken.
Both retrospective and prospective costs may be
either fixed (that is, they are not dependent on
the volume of economic activity, however
measured) or variable (dependent on volume).
From a firm point of view, sunk costs arise when
an investment in an asset cannot be recovered by
Once incurred, sunk costs are not part of the
firm’s alternatives because they cannot be put to
Therefore, an investment is a sunk cost when its
opportunity cost is zero.
The Sunk Cost Fallacy:
Once one has made a significant non-
recoverable investment, there is a
psychological tendency to invest more even
when the return on the subsequent
investment isn’t worthwhile.
Watching a movie to the end, after you are
convinced that it stinks, would be another
Many people have strong misgivings about
"wasting" resources. This is called "loss aversion".
In the above example involving a non-refundable
movie ticket, many people, for example, would feel
obliged to go to the movie despite not really
wanting to, because doing otherwise would be
wasting the ticket price; they feel they passed the
point of no return. This is sometimes called the
sunk cost fallacy.
The popular phrase associated with the sunk
cost fallacy is ‘throwing good money after
The fallacy of sunk costs arises because of a
psychological tendency to try to make an
investment pay off when something happens
to render it obsolete.
Sunk Costs should be avoided while calculating
costs. They are irrelevant for decision-making.
The nature of cost-whether it is sunk or avoidable
From a prospective viewpoint managers should be
very careful before committing to costs that will
become sunk, since such commitments cannot be
ALSO CALLED AS “IMPLIED COST”.
RESULTS FROM USING ASSET INSTEAD OF RENTING ,
SELLING OR LENDING.
ALSO IMPLIES TO FORGONE INCOME FROM CHOOSING
NOT TO WORK
REPRESENTED BY LOST OPPURTUNITY IN USE OF
COMPANY’S OWN RESOURCES EXCLUDING CASH.
INTANGIBLE COST NOT ACCOUNTED.
THETIME AND EFFORTTHATTHE OWNER PUTS
IN MAINTAINING COMPANY RATHERTHAN
A direct expense that a business incurs in conducting an
activity. E.g salaries, wages, materials, etc.
An explicit cost is an easily accounted cost, such as wage,
rent and materials.
Explicit cost are those which the entrepreneur has to pay
from his own pocket.
ABC CO. IS INTO TEXTILES BUSINESS. IT PAYS A
RENT OF Rs.1000 MONTHLY , WAGES OF
Rs.2000, ELECTRICITY EXPENSES OF Rs. 300.
THUS ITS EXPLICIT COST IS 1000+2000+300 =
Long run refers to a time period during which full adjustment to a
change in environment can be made by the firm by varying all inputs,
including capital equipment and factory building.
Cost incurred during this period is long run cost.
It includes all the expenses incurred while bringing about a change in
all the mentioned inputs.
ENVELOPE OF AN INFINITE NUMBER OF
SHORT-RUN AVERAGE COST CURVE.
REFERS TO THE VALUE OF THE NEXT BEST ALTERNATIVE
FORGONE IN MONETARY TERMS.
IT ALSO REFERS TO IGNORING THE NEXT BEST
A PERSON INTO GARMENT BUSINESS DECIDES TO EXPORT
GARMENTS AT Rs. 200 PER PIECE RATHER THAN SELLING IT
DOMESTICALLY AT Rs. 300.
THUS Rs.300 IS HIS OPPURTUNITY COST WHICH HE HAS
FORGONE FORTHE SAKE OF EXPORTING HIS PRODUCT.