Financial Management

What are Avoidable and Unavoidable Costs?

Management must evaluate if a cost is avoidable or unavoidable, as only avoidable costs are relevant for decision-making in the short term.

An expense that can be eliminated (in whole or in part) by selecting one alternative over another is avoidable. Assume, for instance, that a bike store offers custom paint treatments for customers’ already-owned bicycles. If they eliminate the service, they might eliminate the cost of the bicycle paint.

Also, imagine that they employed a part-time painter to complete the task. The salary of the painter would likewise be an avoidable expense.

What are Unavoidable Costs?

Unavoidable costs are those fixed and necessary costs that do not change or decrease in the short term. They must be incurred to stay in the business.

For instance, a corporation might sign a long-term lease for equipment or a production facility. Typically, these types of leases do not permit cancellation, so if this one does not, the needed payments are non-negotiable expenses for the lease term.

Avoidable Costs

Variable costs are avoidable costs, as variable costs cease to exist if the product is no longer manufactured or the business unit (such as a segment or division) that created the variable costs ceases to operate. In contrast, fixed expenses may be inescapable, partially unavoidable, or merely avoidable under specific conditions.

Remember that fixed costs remain constant over time and within a relevant production range and are not easily eliminated in the short term. Consequently, most fixed costs are likewise inescapable. If a fixed cost is unique to one of the choices, then it may be possible to avoid it. Future costs that are important to decision-making are avoidable expenses. Past costs are never avoidable costs.

Remember that we are using a short-term perspective to decide whether costs can be avoided. In the long run, almost all costs can be avoided. Assume, for instance, that a corporation has a ten-year lease on a production facility that cannot be terminated. It would be non-cancellable and therefore unavoidable for the initial ten years. However, after ten years, it may be avoided.

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