Resolving the Sunk Cost Conflict

Abstract

Abstract Purpose Compare and contrast how the accounting, organizational behavior and other literatures analyze sunk costs. Sunk costs form a key part of the decision-making component of the management accounting literature, which generally include previously incurred and unrecoverable costs. Management accountants believe, 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 matters of accountability such 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 to denote some ambiguities that decision usefulness and accountability introduces into accounting discourse. Methodology/approach Review, summarize and analyze the above literatures Findings Managerial accountants can apply many lessons from the various literature sources. Originality/value We also show how differing opinions on how to treat sunk costs impact a firm’s decision-making process both economically and socially.