What term describes a cost that cannot be recovered once it has been incurred?

• A. Fixed cost
• B. Sunk cost
• C. Variable cost
• D. Opportunity cost

Answer: (B)

The term that describes a cost that cannot be recovered once it has been incurred is known as a sunk cost. Sunk costs are expenses that have already been paid, and regardless of future outcomes, they cannot be recovered. This concept is crucial in decision-making processes because it emphasizes that past expenditures should not influence current and future financial choices.

For example, if a company invests in a new product and spends significant money on research and development, that money is considered a sunk cost once spent. If the company later decides to discontinue the product, the R&D expenses should not factor into the decision, as they cannot be recuperated.

Understanding sunk costs helps individuals and businesses avoid the "sunk cost fallacy," which is the tendency to continue investing in a project due to the amount already spent, rather than evaluating the current value or potential of the project going forward.