Avoidable cost

An avoidable cost is a cost that can be eliminated by not engaging in or no longer performing an activity. For example, if you choose to close a production line, then the cost of the building in which it is housed is now an avoidable cost, because you can sell the building. The avoidable cost concept is crucial when engaging in cost reduction activities.

Over the long term, all costs are avoidable. For example, a 30-year lease is avoidable if the decision-making period is more than 30 years. In the short term, legally-mandated or government-mandated costs, such as leases or environmental cleanup obligations, are not avoidable costs.

In general, a variable cost is considered to be an avoidable cost, while a fixed cost is not considered to be an avoidable cost. In the very short term, many costs are considered to be fixed and therefore unavoidable.

From a risk management perspective, it is useful to periodically review the cost structure of a business and try to shift as many costs as possible from the unavoidable to the avoidable category, which gives management greater room to maneuver if the business suffers a revenue shortfall and must cut back on its expenses. For example, a lease can be renewed with a shorter term, so that management has the option to cancel the related expense within a shorter period of time than had previously been the case. As noted in the example, the general strategic approach to dealing with avoidable costs is to commit to shorter time periods for any planned expenditures.

Similar Terms

An avoidable cost is also called an escapable cost.

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