What is Sunk Cost?

The definition
Why sunk costs are hard to ignore

A sunk cost is money you've already spent and can't get back, such as last year's equipment purchase or a nonrefundable deposit. It's the same whatever you decide next, so it shouldn't affect the decision. Compare your options on the costs and revenues that are still ahead of you.

The definition

OpenStax's Principles of Accounting, Volume 2: Managerial Accounting (section 10.1, opened October 29, 2026) says:

"A sunk cost is one that cannot be avoided because it has already occurred. A sunk cost will not change regardless of the alternative that management chooses; therefore, sunk costs have no bearing on future events and are not relevant in decision-making."

It sets sunk costs against relevant costs, which it defines as a "cost that influences the decision being made." An irrelevant cost is one that "has no effect on the decision being made because it is the same under either alternative."

Why sunk costs are hard to ignore

OpenStax notes that "sunk costs are difficult to ignore due to human nature and are sometimes incorrectly included in the decision-making process." It adds that managers "may be reluctant to ignore sunk costs when making decisions, especially if the prior decision to purchase the asset was an unwise one."

This is the sunk cost fallacy. OpenStax's Introduction to Philosophy (section 2.2) defines it as "thinking that attaches a value to things in which you have already invested resources that is greater than the value those things have today." Its business example is a person who "continues to invest money in a failing venture," which it calls "throwing good money after bad."

Worked example: repair the old press or lease a new one

The figures here are a sample. A print shop paid $6,000 last year for a used printing press. The press now needs a $2,500 repair to keep running for the next 12 months. The alternative is to lease a new press for $300 a month and sell the old one for $500. Both presses would produce the same work, so revenue is the same either way.

Repair the old press, next 12 months:
- repair $2,500 + running costs $1,800 = $4,300.
Lease a new press, next 12 months:
- lease 12 × $300 = $3,600;
- running costs $600;
- less $500 from selling the old press;
- $3,600 + $600 − $500 = $3,700.
Difference: $4,300 − $3,700 = $600 lower cost to lease.

The $6,000 paid last year isn't in either column. It has already been spent, and it's the same whichever option the shop picks. Keeping the old press because we already paid $6,000 for it is the sunk cost fallacy. The $500 from selling the old press is relevant, because the shop only gets it if it leases.

The revenue is the same under both options, so it's an irrelevant revenue. A real decision might also weigh things like downtime or reliability. Those count only if they differ between the options.

How to keep sunk costs out of a decision

List the options side by side. For each one, write down only the future costs and revenues.
Cross out anything that's the same under every option, including money already spent.
Keep what differs. That includes future cash you'd receive under one option, like the resale value in the sample.
Check equipment decisions carefully. OpenStax says, "Sunk costs are most problematic for business decisions when they pertain to existing equipment," and "The book value of an asset (historical cost – accumulated depreciation) is a sunk cost regardless of whether a business keeps the asset or disposes of it in some manner."

Sunk costs vs. fixed costs

They overlap but aren't the same. A sunk cost has already been paid. A fixed cost doesn't change with how much you produce, like rent. OpenStax's Principles of Economics 3e (section 7.3) notes that "fixed costs are often sunk costs that a firm cannot recoup." A future fixed cost you can still avoid, for example by not renewing a lease, isn't sunk yet. OpenStax Managerial calls that an avoidable cost: one "that can be eliminated (in whole or in part) by choosing one alternative over another."

Where Billed fits

Billed's expense and receipt tracking page says, "The expense report shows what you spent over a date range." Those records tell you what you've already spent, and that spending is sunk. They're useful for finding the costs you've been paying, but a decision should turn on the future costs and revenues of each option. Billed's expense and receipt tracking page doesn't compare decision options.

Frequently Asked Questions

What is a sunk cost in simple terms?

Money you've already spent and can't get back. OpenStax defines it as a cost "that cannot be avoided because it has already occurred," and says sunk costs "are not relevant in decision-making."

What is the sunk cost fallacy?

It's valuing something you've invested in at more than it's worth today, because of what you've already put into it. OpenStax's Introduction to Philosophy gives the example of a business person who keeps investing in a failing venture, "throwing good money after bad."

How do you avoid the sunk cost fallacy?

Compare your options using only future costs and revenues that differ between them. Leave out money already spent, because it's the same whatever you choose. In the sample, the $6,000 already paid for the press doesn't change the $600 difference between repairing and leasing.

Is a sunk cost the same as a fixed cost?

No. A sunk cost has already been paid. A fixed cost, like rent, doesn't change with output. OpenStax notes that "fixed costs are often sunk costs that a firm cannot recoup," but a future fixed cost you can still avoid, such as a lease you don't have to renew, isn't sunk yet.

Is the book value of old equipment a sunk cost?

Yes. OpenStax says the book value of an asset, its historical cost minus accumulated depreciation, "is a sunk cost regardless of whether a business keeps the asset or disposes of it in some manner." What's relevant is any cash you'd get from selling it and the future costs of each option.

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