Define the concept of a sunk cost.

The concept of a sunk cost refers specifically to expenses that have already been incurred and cannot be recovered. This means that once the money has been spent, it cannot be retrieved regardless of future decisions or outcomes. For example, if a company has invested in equipment that is now outdated, that investment is a sunk cost. It should not influence future business decisions, such as whether to invest in new technology, since the investment in the outdated equipment cannot be undone.

In managerial accounting, recognizing sunk costs is crucial because it helps managers make decisions based on future costs and benefits rather than being influenced by past expenditures that cannot affect current situations. Understanding this concept is important in avoiding biases that can lead to inefficient decision-making.