Resolving the Sunk Cost Apory

• In Event: Management Accounting 1

Abstract

Sunk costs form a key part of the decision-making component of the management accounting literature. Generally stated, the proffered lesson about sunk costs is that since current or future actions cannot change sunk costs, decision makers should ignore them. Thus, ongoing fixed costs or previously incurred sunk costs, while relevant for such matters as costing, income determination, and performance evaluation are irrelevant for most short- and long-term decisions. However, the organizational behavior literature indicates that sunk costs affect decision makers’ actions—especially their emotional attachments to the related project and the asymmetry of attitudes regarding the recognizing of losses and gains. Called the sunk cost effect or sunk cost fallacy, this conflict in sunk costs’ underlying nature reflects one element of incoherence in contemporary accounting discourse. We discuss this sunk cost conflict from an accounting and a philosophical perspective in order to elucidate the ambiguities that decision usefulness introduces into accounting discourse. We also show how reporting committed costs could help decision makers clarify some economic implications regarding sunk costs.

Authors

• Alan Reinstein, Wayne State University

• Mohamed Bayou, University of Michigan-Dearborn

• Paul F Williams, North Carolina State University