What is an Avoidable Cost?

An avoidable cost is a cost that can be eliminated by not engaging in or no longer performing an activity. 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. 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. The avoidable cost concept is crucial when engaging in cost reduction activities.

Avoidable Cost Analysis

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.

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Example of an Avoidable Cost

If a company president chooses to close a production line, then the cost of the building in which it is housed is now an avoidable cost, because the company can now sell the building. Similarly, if a rental unit complex is converted over to office space, then the cost of maintaining the pool for renters can now be eliminated. As another example, a company can allow its employees to work from home; this means that the office in which they had been working is now an avoidable cost.