Capital budgeting?

Question

When a cost has been incurred prior to the commitment to a capital project, it is often treated as a “sunk cost.” How do you decide whether an expenditure should be included in project cost or excluded as a sunk cost? How do you avoid having managers manipulate the decision?

Answer 1

Maybe by the date the cost can be claimed. I.E. if before project date Mar 1 2007, then it's a sunk cost.

Or with managers manipulating the system you need to really detail out the following

A) What the project is. Like implementing system B.
B) What the project & sunk costs are. If they are related to System B implementation, it's a project cost, etc.

Basically if you make them really detail out and spell out what the costs are, they shouldn't have any problems justifying why it is a project or sunk cost.

And if you have pretty thorough people (third party, non managerial, or at least in different departments, and not on the project), to go through the expenses and read their reasons for claiming it, then you'll cut down on manipulation.