April 18, 2021

SB-Accounting

Accounting + Finance Blog

Meaning of Avoidable Cost with Key Explanations

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Cost is important to business owners and managers. To earn revenue, costs must be incurred. So far, various types of costs have been discussed. In this article, the avoidable cost will be defined and explained.

Definition of Avoidable Cost

A cost which an entity’s management can eliminate as a result of a change in its course of action.

It can also be defined as an escapable cost that resulted from the closure of a product line, department or operation. Or from making an alternative decision.

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Also, it is a cost that is not required anymore because of a decision by an entity’s management.

Key Explanations

Avoidable cost is a type of cost. Several articles, in this blog, have elaborated on other types of costs. Including the element of costs, relevant costs among others.

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Certain costs are avoidable. Not all costs incurred are avoidable. Generally, variable costs can be avoided. Either by reducing the expenses incurred or eliminating it.

Fixed costs are not avoidable. If a firm decides to let go of a product line, it must pay rent on the building its uses. Therefore rent is not an avoidable cost to that extent.

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Furthermore, in the short run, the only variable cost can be avoidedd. The long-run period allows the entity’s management to avoid both variable and fixed cost to the extent it is possible. These costs can only be avoided when the business owner or management take a course of action. This might be shutting down a product line, a factory, department or operation.

Also, a company’s directors may decide to take an alternative decision. Thereby, discarding a present decision. This will make a certain cost in the present decision to be avoidable.

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Importance of Avoidable cost

Categorizing costs as avoidable, helps the management filter its expenses. This means that when an entity’s management knows the costs it can avoid, it becomes easier to eliminate it when the need arises.

It can help the firm compete with other entities favourable. In the face of competitions, the business may avoid costs to make their product less expensive than its competitors.

A good example of this is what Google did with its latest flagship smartphone, the Pixel 5. The company decides to make Pixel 5 less expensive than its competitors. That is Samsung and Apple’s iPhone. Google may have eliminated certain costs to achieve the milestone.

Also, the company can continue business if it faces financial difficulties and inflation. When an entity faces financial challenges, knowing the expenses and other costs that can be avoided can be a relief. Also, during inflation, the company will be able to reduce this set of costs or avoid them.

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Conclusion

To summarise, avoidable costs are not required by the entity. Therefore, it must be eliminated as soon as possible. Another name for it is escapable cost. More to this, it occurs when an entity’s management or owners change a course of action.

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