What Is an Avoidable Cost?

Just like the name implies, an avoidable cost is any cost that has been eliminated or averted by the choice to refrain from doing something. The scope of the activities included in this economic term are limitless because the meaning of the term is derived from any type of action that leads to the saving of money that would have been incurred if that particular suspended activity had been done. Another way of referring to an avoidable cost is to call it an escapable cost, which still conveys the fact that the cost is one that can be avoided.

An example of an avoidable cost can be seen in the case of a department store that decided to lay off its seasonal workers at the beginning of the year. In this instance, the avoidable cost the department store avoided by choosing to lay off workers includes the wages the store would have been obliged to pay the workers and any other associated costs. Another example is a company that makes prefabricated houses that stopped the production of a particular design of such houses due to the high cost of producing the homes. The avoidable cost here would include the money that would have been spent on raw materials as well as the labor that would have been expended on the house.

One of the distinguishing characteristics of an avoidable cost is the fact that it is within the power of the firm or individual to avoid through the decision to refrain from doing something. This is in contrast to other types of cost that may not leave such an escape route. Avoidable costs are usually associated with the drive by companies to embark on measures aimed at saving money through the elimination of products or services that are not performing as expected.

For instance, if a particular line of makeup produced by a cosmetics company is found to be performing below the expectation of the company's management, it might decide to stop the production of that particular line in order to remove the cost associated with the product. In this case, the cost associated with the production of the cosmetic line is avoidable and also within the power of the company to avoid. The avoidable cost here includes items like the cost of the raw materials and the marketing and promotion budget as well as other costs associated with the production of the makeup.