Fixed Cost vs. Sunk Cost: What's the Difference?
Edited by Janet White || By Harlon Moss || Published on December 22, 2023
Fixed costs remain constant regardless of business activity, while sunk costs are past expenditures that cannot be recovered.
Key Differences
Fixed costs, such as rent or salaries, do not vary with the level of production or sales and are predictable expenses. Sunk costs refer to money already spent and irrecoverable, like a non-refundable marketing campaign expense.
Fixed costs are an integral part of a business's break-even analysis, representing expenses that must be covered regardless of business performance. Sunk costs, however, should not influence future business decisions as they cannot be recovered.
Planning, businesses often allocate fixed costs to set budgetary constraints; these costs are considered in pricing and profitability analyses. In contrast, sunk costs are historical and should be disregarded in future planning since they cannot be altered or recovered.
Fixed costs can be a challenge for new or small businesses due to their constant nature, impacting cash flow. Sunk costs represent past business decisions, and acknowledging them as non-recoverable is crucial for effective future investment decisions.
Examples of fixed costs include lease payments, insurance, and regular salaries, which remain stable over time. Sunk costs examples are past investments, such as spent R&D expenses, which remain the same regardless of future outcomes.
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Comparison Chart
Definition
Regular, unchanged costs regardless of production level.
Past costs that are no longer recoverable.
Variability
Non-variable with production or sales volume.
Incurred in the past, no future variability.
Recoverability
Not directly recoverable, but influential in pricing.
Cannot be recovered or altered.
Role in Decision-Making
Considered in current and future budgeting.
Should be excluded from future decisions.
Examples
Rent, insurance premiums.
Money spent on a failed marketing campaign.
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Fixed Cost and Sunk Cost Definitions
Fixed Cost
Constant costs over a specific period.
The salary of permanent staff is a fixed cost.
Sunk Cost
Irrecoverable costs from past actions.
A non-refundable deposit on a cancelled event is a sunk cost.
Fixed Cost
Overhead costs not tied to production levels.
Fixed costs for a retailer include store utility bills.
Sunk Cost
Expenses that should not influence future business decisions.
A failed advertising campaign represents a sunk cost.
Fixed Cost
Predictable expenses included in budgeting.
A restaurant’s lease payment is a fixed cost.
Sunk Cost
Historical financial outlays without future value.
The initial cost of a replaced machine is a sunk cost.
Fixed Cost
Costs that do not change with production volume.
The monthly rent for a factory is a fixed cost.
Sunk Cost
Costs already incurred and irretrievable.
Money spent on a discontinued product development is a sunk cost.
Fixed Cost
Regular expenses unaffected by business activity.
Annual software licenses are a fixed cost for a tech company.
Sunk Cost
Past expenditures that no longer affect current decisions.
Investment in outdated technology is a sunk cost.
FAQs
What is a sunk cost?
A cost that has been incurred and cannot be recovered.
Can sunk costs be recovered in the future?
No, sunk costs are permanently irrecoverable.
How do businesses plan for fixed costs?
They include them in regular budgeting and financial planning.
Should sunk costs influence business decisions?
No, sunk costs should not affect future decisions.
How do fixed costs impact profitability?
They must be covered by revenue for a business to be profitable.
Are salaries a fixed cost?
Yes, regular salaries are typically considered fixed costs.
What is a fixed cost?
A cost that remains constant regardless of production or sales volume.
Can a sunk cost ever be a variable cost?
No, once incurred, sunk costs are not variable.
Are all overhead costs fixed costs?
Most overhead costs are fixed, but not all.
Is a failed marketing effort a sunk cost?
Yes, if it doesn’t bring the desired results.
Does depreciation count as a sunk cost?
No, depreciation is an accounting method, not a sunk cost.
Is research and development a sunk cost?
If the R&D does not lead to successful outcomes, its cost becomes sunk.
Can sunk costs be reclaimed through tax deductions?
Sometimes, but they still remain sunk costs.
Do fixed costs vary with business size?
They can, but within a specific size, they remain constant.
Are fixed costs the same for every business?
No, they vary depending on the business type and scale.
How do startups manage high fixed costs?
Through careful budgeting and seeking external funding.
Can a fixed cost change over time?
It can change but remains fixed for a certain period.
Why are sunk costs irrelevant for future planning?
Because they cannot be altered or recovered.
What is an example of a sunk cost in personal finance?
Money spent on a non-refundable vacation package.
Do fixed costs affect break-even analysis?
Yes, they are crucial in calculating the break-even point.
About Author
Written by
Harlon MossHarlon is a seasoned quality moderator and accomplished content writer for Difference Wiki. An alumnus of the prestigious University of California, he earned his degree in Computer Science. Leveraging his academic background, Harlon brings a meticulous and informed perspective to his work, ensuring content accuracy and excellence.
Edited by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
