ACCA Performance Management (F5) Certification Practice Exam

Which of the following would normally be considered a sunk cost?

1. Future costs associated with an investment

2. Cash spent on research that cannot be recovered

3. Costs that can be avoided if a project is discontinued

4. Only fixed costs paid in advance

The correct answer is: Cash spent on research that cannot be recovered

A sunk cost refers to money that has already been spent and cannot be recovered, regardless of future decisions. Cash spent on research that cannot be recovered fits this definition perfectly. Once the money has been spent on research, it is gone and should not influence any future decisions or evaluations regarding continuing or abandoning a project. In contrast, future costs associated with an investment, costs that can be avoided if a project is discontinued, and fixed costs paid in advance are not classified as sunk costs because they either involve future expenditures that have not yet been incurred or costs that can be modified based on changes in decision-making regarding the project. Understanding the concept of sunk costs is crucial in performance management, as it helps individuals and organizations focus on relevant costs for decision-making rather than being influenced by past expenditures that cannot be changed.