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What is Cost Avoidance? - Definition & Examples

Instructor: Douglas Stockbridge

DJ Stockbridge is currently pursuing a Masters degree in Accounting.

Cost avoidance is an important concept in business that is rarely mentioned because it gets confused with a similar concept called cost savings. In this lesson, we will discuss the what cost avoidance is and show you some examples of it.

Cost Avoidance in the Business World

Imagine you are the owner of a fast food restaurant in your hometown. This is a business that you started yourself 20 years ago. You are not a franchisee and this is not a major, national fast food business. You are local and have been successful since inception; however, the business has faced more intense competition recently. Some of the national chains have moved into town, and one is right across the street. Your profits have decreased as a result. You implemented as many cost savings techniques as you could, but you didn't really start to improve your position until you also understood and adopted some cost avoidance techniques. Thankfully, you had read this article.

In this lesson, we will define what cost avoidance is, and then we will give some examples that you, as the fast food owner, may have adopted.

Cost Avoidance Defined

Cost avoidance is a way of decreasing your costs by lowering a potential increase in expenses. It's like putting in a star basketball player even though that team has already lost. That individual's responsibility is just to decrease the loss gap. Instead of losing by 20 points if that person had remained on the bench, the team may lose by just 5 points. So, while a cost is still recorded, the cost isn't as large as it would have been. For example, a supplier may have planned to increase its prices by 10% next year. Cost avoidance would be if the company negotiated with the supplier and the supplier only increased prices by 5%.

Notice, in the example above that costs are still rising, just not as much as initially expected. Reductions in expenses that have a direct impact on the company's bottom line (i.e. profit/loss) are considered cost savings. Using the example above, cost savings would be if the supplier decreased its prices for next year instead of just lowering the planned increase. Cost savings is often considered a 'hard' cost, however, cost avoidance is considered 'soft' savings because the effect on the bottom line is not as easily recognizable and identifiable.

Real World Examples of Cost Avoidance

There are several different ways you may see cost avoidance in the business world. We'll run through several ways you (as the owner of the fast food restaurant) may have used cost avoidance to improve your position.

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