A sunk cost is the cost incurred and has no potentials for recoveries in the future. Sunk
costs do not affect managerial decisions as they are independent of any organization's cost in the
future. Examples of sunk costs in an organization may include marketing campaign expenses and
costs incurred when buying new equipment. If an organization incur cost during market
campaigning or purchase new equipment, the organization will not try to recover the money as
the campaign and equipment are sunk cost.
The incremental cost is the cost incurred due to an additional unit of the product being
processed. For instance, if a company produces two units and decides to add two more units to
their production, the cost incurred during the processing of the additional two units is the
incremental cost. The cost is used to determine the cost difference between alternatives. For
instance, in the two additional units' production, the additional business cost on production or
labor cost. Therefore the incremental cost helps the managers evaluate whether the business
should produce more units or not depending on the profit.
Out-of-pockets costs are cost that an organization incurs that requires cash payment in the
current period. The insurance does not cover the costs. For instance, expenses used in car rentals,
meals, or even during work-related supplies and tools.
Opportunity cost is the cost incurred or the value/benefits lost when an organization
chooses one option over another option. For instance, when buying business equipment, the
company should consider buying a piece of new or used equipment. When purchasing used
equipment, certain things cannot be covered by the same warranty under new equipment.
Therefore, the additional cost incurred in purchasing or repairing is the opportunity cost.
Nonfinancial information is very important in making managerial decisions as they help
managers decide market share, quality management, and environmental protection.
