Sunk costs and opportunity costs are inherent in decision making.Required: A. Define the terms "sunk cost" and "opportunity cost."B. How are sunk costs treated when making decisions?C. "Information about sunk costs can be found in the financial statements and accounting records; however, information about opportunity costs is omitted." Do you agree with this statement? Explain.
What will be an ideal response?
A. A sunk cost is a past cost that will remain the same no matter which of the alternatives under consideration is chosen. An opportunity cost is the potential benefit given up when the choice of one alternative requires the sacrifice of another. Opportunity cost is measured by using the net benefit of the best alternative not taken.
B. Sunk costs should be ignored when making decisions, as one cannot change what has happened in the past.
C. Yes. The accounting system is historical; its main focus is on events that have occurred. Consequently, information about sunk costs will be found in the financial statements and accounting records. On the other hand, opportunity costs refer to the benefits from alternatives that are not selected. Because these alternatives were not chosen, an historical system will not include any measures of these costs.
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