ACCA Performance Management (F5) Certification Practice Exam

What should be included for sunk costs in decision-making?

1. Future anticipated profits

2. All fixed cost commitments

3. None, as they are irrecoverable

4. Potential revenue from alternative scenarios

The correct answer is: None, as they are irrecoverable

Sunk costs are expenditures that have already been incurred and cannot be recovered. For effective decision-making, it's essential to focus on costs that will impact future outcomes rather than those that are unrelated to current decisions. Since sunk costs are historical and irrecoverable, they should not influence future decisions. This approach aligns with the principle of relevant costing, which emphasizes considering only future costs and benefits that will change based on the decision at hand. Including sunk costs in decision-making can lead to fallacious reasoning, often resulting in irrational choices based on past investments rather than potential future outcomes. Therefore, recognizing that sunk costs are irrelevant ensures that decisions are based on maximizing future benefits rather than clinging to past losses or expenditures. This understanding of sunk costs is vital for optimization in performance management, as it directs focus to relevant data influencing future performance rather than historical costs that have already been incurred.