Entry costs are sunk costs. Sunk costs. Total and specific costs

management accounting cost cost

Sunk costs are understood as the cost of already acquired resources, when the choice in favor of some alternative cannot affect the amount of these costs. These are costs incurred as a result of earlier decision and which cannot be changed by any decision in the future. The category of sunk costs also includes the residual value of previously acquired property. If the machine (machine, mechanism) was purchased 4 years ago for 1,000,000 rubles. with an expected service life of 5 years and zero scrap value, then the residual value will be 200,000 rubles. with even depreciation. This residual value must then be written off from the account, regardless of which alternative course of action is taken in the future. If the machine were turned into scrap, then these 200,000 rubles should still be debited from the account. This cost cannot be changed by any future decision, and therefore the costs in this case are classified as sunk costs.

Sunk costs are not taken into account when making a decision, but there is a difference between this category and the category of non-recoverable costs, since not all costs that are taken into account are sunk costs. For example, when comparing two alternative methods production, it may turn out that the costs of basic materials are the same for both methods, and thus the costs of basic materials can be categorized as non-accountable costs. But the cost of materials will not be irrecoverable in this case, as they will be incurred in the future.

Incremental (incremental) and marginal (marginal) costs

Incremental (or additional, incremental, differentiated) costs is the difference in costs between the two analyzed options. For example, the incremental costs and revenues for increasing output and sales from 1,000 to 1,100 units per week are incremental costs and revenues for producing and selling an additional 100 units. in Week. AT short term incremental costs are usually variable costs. But incremental costs can be fixed costs. If the fixed costs change as a result of the decision, an increase or decrease in such costs will be an additional cost or a decrease in the original cost. If the fixed costs do not change as a result of the decision, the incremental fixed costs will be zero, that is, irrelevant.

The decision rule for incremental costs is as follows: if the incremental revenue exceeds the incremental costs, then a decision should be made, otherwise rejected.

Marginal (marginal) costs and revenues represent incremental costs/revenues for only one additional unit of output, while incremental costs/revenues reflect additional costs/revenues resulting from the production of a certain number of additional units of output. This term is commonly used by economists.

It should be noted that incremental (incremental) and marginal (marginal) costs and revenues are always relevant, since they are the result of a decision.

The following calculations are excerpts from the company's sales program for the following year:

Management is considering setting up a new sales area in the north of the country next year. It is planned to increase advertising spending by 30% and introduce an additional position of a traveling salesman with a salary of $15,000 per year, who will be responsible for the sale of goods in a new market. In addition, an increase in travel (travel) expenses by 10% per year is expected. The volume of the annual target for the sale of products at the current price for the new sales territory is 10,000 units. product. The estimated cost of variable production costs is $5 per unit. Should the company, on the basis of this, create a new sales area?

The solution requires a detailed analysis of only incremental (incremental) income and costs that may arise as a result of the creation of a new sales territory, since the existing volume of income and related costs will remain unchanged, that is, irrelevant:

Incremental (incremental) analysis of income and expenses

As we can see, it is profitable for the company to create a new sales area, since incremental revenues are higher than incremental expenses by $100,000. It would be possible to recalculate the overall performance of the company (i.e., together with data on income and costs already in the estimate) and compare them with the original data, but the results will be the same. It is easier to compare incremental (relevant) indicators only.

incremental cash flows

Cash flows of projects and interest expenses of the firm

The project's cash flows should be discounted at its cost of capital, which is the weighted average of the cost of raising debt financing and capital in the form of preferred and ordinary shares, taking into account the risk of the project. In addition, the weighted average cost of capital (WACC) project is the rate of return required to meet the requirements of all investors in the firm - debt holders and shareholders. The discounting process reduces the value of future cash flows of the project, which corresponds to a reduction in their value due to the cost of servicing capital. Accordingly, if interest expenses were first deducted from profit, and then the resulting cash flows were discounted at wacc, this would double-count debt service costs. Therefore, when calculating the cash flows of the project interest costs should not be deducted,

Note that when calculating the accounting profit of a project (firm), the interest cost deducted from profit.

When evaluating a project, we will, as already noted, take into account only those cash flows that arise precisely as a result of the adoption of this project. These cash flows, called incremental (incremental), are the changes in the firm's existing cash flows after the project is accepted. Here we highlight three important points related to identifying incremental cash flows.

Sunk costs (drowned costs, sunk costs") - these are costs that have already been incurred - therefore, the considered decision to implement a capital project will no longer affect these cash flows. Accordingly, since sunk costs are not included in the incremental cash flows of the project, they should not be taken into account in project analysis. As an illustration, we present next example: in 2001 the company Northeast Bank Corp. was considering opening a new branch in the newly built area of ​​Boston. To help evaluate this project, the bank northeast Back in 2000, he hired a consulting firm. The cost of the latter's services was $100,000, and for some tax reasons, this amount was paid and expensed in 2000. Were these 2000 costs relevant to the decision to found the branch in 2001? The answer is no, because in 2001 that $100,000 was already sunk costs, which could not affect the bank's future cash flows northeast whether or not a new chapter is founded. Often estimates show that a project has a negative net present value if all associated costs, however, considering only icre-mental cash flow - excluding sunk costs - the project may turn out to be acceptable.

Sunk costs. These are past costs that no other alternative is able to correct. In other words, these previously incurred costs cannot be changed by any management decisions. From the previous example, it can be seen that 500 rubles are sunk costs. Sunk costs are not taken into account when making decisions.

Sunk costs, or costs of the past period, are the costs of resources already acquired as a result of a previously made decision, when the choice in favor of some alternative cannot affect the amount of these costs. Sunk costs are not taken into account when making future decisions.

SB = Operation Costs - Reimbursable Costs = Sunk Costs.

However, the costs not always taken into account in the assessments are irretrievable.

Sunk costs are costs that cannot be controlled. management decisions.  

Obtaining sufficient information for decision-making is achieved by grouping costs into non-refundable, imputed, incremental, marginal.

But still, attention should be paid to the fact that the resources used to pay off the CCA are returnable, and the resources used to reimburse the accrued income for payments are irretrievably lost by the enterprise. It goes without saying that the financial resources invested in the ZKV will somehow return with income from the sale of products own production(works, services), i.e. increment. The income received will allow to reimburse the costs of the CCA and replenish their own financial resources.

Incompatibility is associated with different interpretations of such a thing as costs. If the company is going to make a profit, then the money spent, in our example, on a chest of drawers, an overcoat will become an expense only when a profit is made thanks to them. Let's say we sell a chest of drawers and only at this moment the price paid for it will become, which will pay off the costs of it. If we are not going to receive income, then the money spent on the purchase will never pay off, and therefore, at the moment when the price was paid, sunk costs arose.

The creation of FIGs is the main way of industrial restructuring, which forms the basis for future stabilization of the economy as a whole. Despite the significant government spending on supporting small businesses (benefits, transfers, non-repayable loans, etc.), the country's economy does not receive the corresponding effect from the activities of small enterprises. They are most effective in the sphere of circulation and service of life in the sphere of the real economy, their insignificant number.

The principle of irrevocable spending of public resources means that the funds used to finance the national economy, social and other purposes do not need to be reimbursed. This mode of spending financial resources differs, for example, from the use of credit funds. However, following the type of irrevocable does not mean that one can be indifferent to the final outcome of the use of public financial resources. The procedure and conditions for their investment in various types of costs should be such as to promote the development of the economy and culture, increase labor productivity and increase national income, and ultimately lead to a general increase in public financial resources. Unfortunately, the system of irrevocable financing of public expenditures that existed until recently cultivated mismanagement and dependency among

Budget appropriations, even when they were in the form of loans from credit institutions, in practice, in most cases, were irrevocable. In May 1930, a decision was made on the irrevocable appropriations from the state budget for financing state enterprises. The cost of capital investments began to be covered mainly through direct budget financing. This procedure was extended to all capital investments in state industry, and since 1934 - to all branches of the state sector of the economy. After 1930, long-term lending for capital investments was retained only for collective-farm cooperative organizations.

Sunk costs are not projected incremental costs and therefore should not be included in capital budget analysis. Non-refundable costs are those costs incurred earlier, the value of which cannot change due to the acceptance or non-acceptance of the project.

Sunk costs are not projected incremental costs and therefore do not need to be included in capital budget analysis. Non-refundable costs are those costs incurred earlier, the value of which cannot change due to the acceptance or non-acceptance of the project. For example, an enterprise assessed the feasibility of opening its new production in one of the regions of the country, having spent a certain amount on this. These costs are non-refundable.

Sunk costs, i.e. the costs of past periods are not significant for making managerial decisions.

Table data. 5.13 indicate that the factors in the increase in the cost of the basic materials spent on the manufacture of product K were the increase in the price of 1 kg of material A, as a result of which the overspending amounted to 58 rubles. the increase in returnable and the presence of non-refundable expenses led to an increase in material costs by 40 r. as a result of the replacement of material B with material C, the cost of product K increased by another 31 rubles. The savings in the amount of 78 rubles, obtained as a result of reducing the amount of material A included in the product (net consumption), reduced the allowed overspending, which ultimately amounted to 51 rubles.

With the exhaustion of stocks, the entrepreneur also disappears. At the same time, the main residual funds of mining enterprises (mines, overhead complexes, processing plants and other structures) are practically impossible to be used further, or re-profiled, or sold. Thus, after the depletion of reserves or in the event of early termination of mining operations for some other (economic, technological) reasons, the possibilities for generating income are practically exhausted. Moreover, the liquidation of mining enterprises is very often associated with the need for additional and already irretrievable costs for the restoration of the disturbed natural environment.

Sunk Costs Sunk costs are not projected incremental costs and therefore should not be included in the

Raw materials2 that went into processing are reduced by the amount of returnable and non-returnable waste (losses). The amount of returnable waste is determined by their actual weight, and non-returnable - as the difference between the weight of raw materials released for processing and the weight of actually received products and returnable waste. Return waste (most often a trap product) is valued at the price of possible use, for example, at the price of heating oil, and their cost is excluded from the amount of raw materials costs.

Costs of production, data on which are the basis for decision-making Cost behavior fixed, conditionally fixed, variable, conditionally variable. Costs of the future period accepted and not taken into account in the estimates. Decision making sunk costs, imputed, incremental, marginal

Costs and revenues that are related to the future are considered in terms of whether they are related to the future. this decision. Therefore, from general nomenclature allocate expenses and incomes taken into account, i.e., depending on the decision made. For decision-making, the grouping of costs and incomes into non-refundable, imputed, incremental, marginal ones is of great importance. Non-refundable - these are expenses and incomes of the past period that will not be changed in any way in the future imputed ones arise in case of limited resources and characterize the possibilities for their use in the future incremental ones - they arise additionally in cases of manufacturing a certain batch of products expenses and incomes, but per unit of output.

Put down in the table the categories (irrevocable, incremental, variable, permanent, semi-variable, semi-permanent, adjustable, non-regulated, imputed), which include the following costs

The weak interest of domestic enterprises in using credit to cover pre-production costs is due to a number of factors, including payment and repayment of credit, which, in accordance with market principles of cost accounting, at the same time limit its use. This is due to the fact that the SONT process is associated with a certain degree of risk of not receiving the funds to repay the loan along with interest in the right time. Therefore, enterprises preferred to use irrevocable and free forms of financing. The peculiarity of the circulation of funds directed to the innovation process leads to the presence of a certain time lag between the occurrence of costs and the receipt of income by the enterprise. The presence of a more flexible system of differentiating the value of the interest rate would create certain advantages for better performing enterprises.

According to the new Regulations on the procedure for calculating depreciation on fixed assets of the national economy, the depreciation fund no longer receives re-depreciation amounts, since now its accrual from

Sunk costs

Sunk costs

Sunk costs are expenditures on specialized durable production factors that cannot be used for other purposes or are not liquid.

In English: sunk cost

Finam Financial Dictionary.

See what "Sunk costs" are in other dictionaries:

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