How do we distinguish between the two? CFAI book says include o/h costs and ignore sunk costs. If management has spent time on project evaluation will the costs be sunk or overhead??
I would think that would be sunk costs.
hmmmm… CFAI says management time, information support costs are overhead!!! pg 61 book 3. this is soooo confusing!
O/H on an ongoing basis once the project is underway, not the time managment spends leading up to the project. Think about sunk cost this way. It is money that you spend regardless of the decision outcome. You spend $150K on an environmental engineer to evaluate the use of the land…sunk cost…if you don’t do anything with the land you still have to pay that bill. Same goes for the time management might spend on evaluating the project…it is still time the firm absorbs even if the project is a no-go. Once the project is approved and management is expecting to use a certain % of O/H than it is reasonable to include those costs.
I guess you would need more information. Is this prior to before accepting the project? If it’s after they accepted the project I would then think its overhead. Edit: Sponge beat me to it
cool… that is a neat explanation… thanks Sponge_Bob_CFA…!!