[ryrydirp]

Hello, so I sort of know what a sunk cost is, but I am not sure on an item and after looking online, I’m still not sure. Is interest expense a sunk cost?

Could it be a sunk cost and not one depending on the circumstances?

[MaLoTu]

are you talking about a bond sinking fund?

Almost always from my phone... please excuse my typos!

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[Missy]

A sunk cost is simply a cost that has already been incurred and cannot be recovered. The interest that has already been paid is without a doubt a sunk cost. For future interest it will depend. If a company has 5 years left on a loan but is able to pay it off immediately without penalty, it is not a sunk cost because it can still be avoided. If the company is going to take the entire 5 years to pay off the balance it is a sunk cost because it was already committed to.

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[Skynet]

Think of sunk costs in terms of a manufacturing company in which idle equipment and machinery is paid for but not being used for product manufacturing.

Or to make it easier. Just think about going on a date and paying for an expensive dinner and a movie. Doesn't mean she'll ask you up to her apartment.

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[ryrydirp]

Thanks for the replies.

I get that if something is already paid for, it is a sunk cost. But as interest expense is a bit different. So if you were to say yes or no, in general, do you consider interest expense a sunk cost?

[Missy]

Interest expense is not different. If a cost, ANY cost will be avoided by making a different decision it is not a sunk cost. If a cost will still exist even if the company changes its plans it is a sunk cost.

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[CPA soon]

@mla that sounds more like “controllable” rather than sunk. However I agree that it's incurred and cannot be recovered, and it's a cost that would not affect future decision making. Interest does not add value to an asset like additions for example, so my guess is it's sunk.

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[Missy]

Just remember, sunk has nothing to do with value added (a cost can add value and still be sunk). A sunk cost can also affect future decision making. But if youi've commited to pay interest on a loan for a project that will not happen it is also sunk.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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