Identifying Sunk Costs and Committed Costs

What is the basis for calculating the monthly depreciation amount of equipment?

What is the nature of the stall rental expense?

How do the costs of beef patties and cheese change with an increase in production level?

What is the salary of part-time workers based on?

What is the nature of the advertising expense?

What is the cost behavior of utilities with an increase in production level?

What is the basis for calculating the cost of mini-buns and wrapping materials?

What is the type of cost that is incurred at the opening of the stall and not recurring?

What is the cost behavior of the stall rental with an increase in production level?

What is the cost behavior of the salary of part-time workers with an increase in production level?

Types of Costs

Sunk costs are costs that cannot be recovered and are not avoidable even if the business is closed.
Examples of sunk costs include advertising expense, cost of equipment purchased, and business registration fees paid.

Committed Costs

Committed costs are costs that a company knows it will have to incur at a future date, usually based on contractual agreements.
Examples of committed costs include rent on a long-term lease, 2-year mobile-phone contract, and monthly payments for fire insurance.

Cost Management

Identification of direct and indirect costs is necessary to determine the cost and selling price of a product.
Understanding how costs change is important to ascertain the financial impact of a business decision.

Financial Accountant vs. Management Accountant

Financial accountants and management accountants have different roles and serve different functions within an organization.

Cost Behavior

Variable costs increase in direct proportion to the level of output.
Examples of variable costs include beef patties, cheese, special sauce, utilities, lettuce, onion, mini-buns, wrapping materials, and salary of part-time workers.

Fixed Costs

Fixed costs do not change with the level of output.
Examples of fixed costs include monthly rental cost for a 1-year contract, business registration fee, and depreciation of equipment.

Costs for Decision-Making

Sunk costs and committed costs are not relevant in decision-making as they are the result of past decisions which cannot be reversed.
Variable costs and fixed costs are relevant in decision-making.

Determine whether the given expenses are sunk costs or committed costs. Learn to distinguish between costs that cannot be recovered and those that are not avoidable even if a business is closed. Test your knowledge of cost management concepts.