If management takes a decision against a project, it is expected that the costs involved on that project are completely avoided. However, this is not the case in real sense. And of course, there are certain costs that can never be avoided. This article will examine unavoidable costs.
What is unavoidable cost?
A type of cost that must be incurred despite management’s decision to halt a project, product or services.
These costs must be incurred although the project, product or service has been eliminated by a management decision.
Further, a cost is unavoidable only when management has made a decision to stop a project, withdraw a product or disengaged a service.
Depreciation and rent on office building are applicable to all products the business produces or trade-on. And any services rendered on that building.
Though, the product or service has been halted, the depreciation as well as notional rent (if the building is owned by the company) must be charged and these will erode the profit with no revenue coming out from the products and services that were disengaged.
Examples of unavoidable costs
Rent or lease on building. Even if the decision is taken to halt the product rent must be paid in the short run period. Also, notional rent may be charged on a building owned by the business. These charges will reduce the profit of the entity.
Depreciation on non current assets. This is another expense that the cost cannot be easily reduced on any management decision. Depreciation is charged on property, plants and equipment owned by or leased to the entity. Except in other cases, this expense will still be charged on profit upon the aforementioned management decision.
Staff cost. Certain staff costs cannot diminish on the company’s decision to stop an operation. Administrative staff must be paid salary and other benefits irrespective of management decision to stop a project, product or service.
However, people employed to carry out the task that was liquidated may be relieved of their job as their services are no longer required. Generally, direct labour costs are reduced as a result of the decision. And are avoidable cost. But, indirect labour salaries must be paid regularly.
Fixed costs. All fixed costs are unavoidable costs in the short period of time. This is so, as these expenses cannot be adjusted by the business owner(s) within such period.
For example, a firm cannot easily reduce the expense on rent in that particular year because the management is already committed to paying the amount of the rent for that year. However, in the long run, that is the following year, the business may decide to reduce rent cost by renting a less expensive building.
In a null shell, unavoidable costs are inescapable costs. No matter how management tries to avoid losses, this cost must be incurred. Lastly, most of these expenses are fixed in the short period of time.