Avoidable Costs in Accounting: Definition & Examples

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

What are avoidable costs? When running a business they can be critical. This lesson provides the definition and examples of this concept which is important for all companies, but especially important for companies facing financial difficulties.

Seafood Restaurant

Imagine you are the owner of a seafood restaurant in your hometown. The business has been very successful since its inception 20 years ago, but it's starting to have some difficulties. Two other seafood restaurants have started in town within the last two years. They have 'piggy-backed' on your success. They've even positioned themselves like you with special deals on certain days like 'Half off lobster Wednesdays' and 'All you can eat shrimp on Thursdays.' You want to cut down on your costs so the business will have more money to reinvest. More specifically, you want to cut down on avoidable costs.

This lesson will first define avoidable costs. Then you'll see examples of ways an owner can reduce expenses by targeting avoidable costs.

Avoidable Cost: Definition

An avoidable cost is a cost that is not incurred if the activity is not performed. Put another way, a company can avoid the cost if they no longer produce the good or service. For example, the cost of materials that go into a finished good is an avoidable cost. In order to not pay the cost, the business can simply stop producing the good or service. These costs are often identified as variable costs. They vary based on production. If there is no production, there is no cost.

Examples

As part of your review of your seafood restaurant you notice there are a few avoidable costs that you can eliminate. The first is that for the past few years you have served hamburgers, steaks, and other non-seafood entrees. These are expensive meals to prepare because you need to go through a different vendor than you do to source your seafood. And not to mention, only a few customers order non-seafood meals. If you decided to no longer offer these options the company could save a lot of money.

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