What is a Past Cost?

A past cost is money that has already been spent. These funds cannot be recovered, so the related cost is irrelevant for decision-making purposes. The concept is of critical importance in making project funding decisions, where managers all too often decide to continue funding a project simply because there is a large past cost associated with it. They should instead focus on whether the project would make sense on a go-forward basis.

A past cost is also known as a sunk cost.

Characteristics of a Past Cost

The key characteristics of a past cost are as follows:

No recoverable. A past cost has already been incurred and cannot be recovered, regardless of future actions or decisions.
Irrelevant for decision-making. Past costs are not considered when making future business decisions because they remain constant irrespective of the decision outcome.
Historical nature. Past costs represent expenses that occurred in the past due to prior decisions or events.
Excluded from marginal analyses. Since past costs do not change with different choices, they are excluded from marginal cost analysis or incremental decision-making.

Example of a Past Cost

As an example of a past cost, a business has spent $100,000 on research related to carbon dioxide sequestration. The resulting process turns out to be ineffective. In deciding whether to invest more funds in the project, management should ignore the money that has already been spent on it.