Question

(Managerial Accounting) Inquiring for an example of how Sunk Costs can be applied to the service industry?

Answer 1

Sunk cost -- Definition: An expense that has been made and is not recoverable.

Examples include:

• Capital inputs that are specific to an industry and which have little or no resale value.
• Money spent on advertising, marketing and research and development projects that cannot be carried forward into another market or industry.
• Money spent in building expensive and complex IT systems that are subsequently ditched because they are unworkable
• When sunk costs are high, a market becomes less contestable. High sunk costs act as a barrier to entry of new firms because they risk making huge losses if they decide to leave a market.

sunk costs are everything you spend money on for your business that is not recoverable, including:

• Labor: Salaries and benefit costs, like health insurance and retirement fund contributions, are sunk costs, as soon as they are paid out, as there is ordinarily no prospect of cost recovery for these expenses.
• Facilities and Overhead: Similarly, money spent on rent, electric and water bills, and maintenance and other expenses for your physical space are generally sunk costs, as soon as they are paid out.
• Equipment: Costs for equipment, whether small, such as staplers and desks, or large, such as production machinery and vehicles, tend to become sunk costs over time. Initial purchases may be returnable for a period, such as 90 days, which means that the costs aren't unrecoverable once the return period lapses. Large purchases may be paid on installment, over a period of a year or more, and costs are not sunk until the payment is actually made. Equipment resale value also becomes a consideration, as to how much cash can be recovered in the future.

All other business costs - for your lawyer, marketing, delivery, and anything else you spend money on - become sunk costs, once the expense is made and the funds are not recoverable.