What is an 'Avoidable Cost'

An avoidable cost is an expense that will not be incurred if a particular activity is not performed. Avoidable costs refer to variable costs that can be removed from a business operation, unlike most fixed costs, which must be paid regardless of the activity level of a company.

BREAKING DOWN 'Avoidable Cost'

Avoidable costs are expenses that can be eliminated if a decision is made to alter the course of a project or business. For example, a manufacturer with many product lines can drop one of the lines, thereby taking away associated expenses such as labor and materials. Corporations looking for methods to reduce or eliminate expenses often analyze avoidable costs associated with underperforming or non-profitable product lines. Fixed costs such as overhead are generally not avoidable because they must be incurred whether a company sells one unit or a thousand units. In reality, variable costs are not entirely avoidable in a short timeframe. This is because the company may still be under contract or agreement with workers for direct labor or a supplier of direct materials. When these agreements expire the company will be free to drop the costs.

Example of an Avoidable Cost

In 2016, Procter & Gamble Co. (P&G) undertook a serious effort to rationalize its SKUs, eliminating dozens of unprofitable or low-margin brands from its consumer staples portfolio. Even though fixed costs — items like building rent, utilities, insurance, certain administrative salaries, etc. — still have to be paid despite a reduction in the SKU count, there are significant avoidable costs such as marketing and sales expenses and research and development expenses that P&G has removed from its operations. In any industry where price competition drives down profit margins, companies attempt to identify as many avoidable costs as possible.

RELATED TERMS
  1. Unit Cost

    Unit cost is the cost incurred by a company to produce, store ...
  2. Variable Overhead

    Variable overhead is the indirect cost of operating a business, ...
  3. Direct Cost

    A direct cost is a price that can be completely attributed to ...
  4. Absorbed Cost

    Absorbed cost is a managerial accounting method that accounts ...
  5. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
  6. Cost of Revenue

    The cost of revenue is the total cost of manufacturing and delivering ...
Related Articles
  1. Investing

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  2. Investing

    P&G CEO Says It is in ‘Ongoing Constructive, Active Talks’ with Activist Trian

    As the US consumer goods maker struggles with its top line, P&G hones in on 10 product categories.
  3. Investing

    Will Procter & Gamble's Restructuring Pay Off?

    Procter & Gamble has whittled down its brand portfolio from 160 to 65. Will this strategy pay off?
  4. Personal Finance

    The Complete Guide to Planning a Yearly Budget

    A personal budget is a useful tool for tracking your income and expenses.
  5. Small Business

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  6. Insights

    Procter & Gamble to Cut Gillette Prices (PG)

    P&G have noticed gaps in its product pricing model, and it's working to close that gap by lowering prices.
  7. Investing

    Top 3 Mutual Fund Holders of P&G

    Discover the top three largest mutual fund holders of Procter & Gamble shares, and learn how their investment portfolios could help your portfolio performance.
  8. Taxes

    Is Multinational Tax Avoidance at an End?

    Are governments doing enough to end corporate tax avoidance?
  9. Personal Finance

    Avoid Costly Mistakes With These 4 Investing Rules

    Being well-informed can help avoid the costly surprises that stand in the way of investment success.
  10. Small Business

    Business Startup Costs: It's in the Details

    Don't overlook the details when starting up a business; it's the small expenses that have the potential to make or break a great idea.
RELATED FAQS
  1. How are fixed costs treated in cost accounting?

    Learn how fixed costs and variable costs are used in cost accounting to help a company's management with budgeting and controlling ... Read Answer >>
  2. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
  3. How are period costs and product costs different?

    Product costs are the direct costs involved in producing a product. Period costs are all costs not included in product costs ... Read Answer >>
  4. What is the difference between cost and price?

    Cost is typically the expense incurred for a product or service being sold by a company. Price is the amount a customer is ... Read Answer >>
  5. What are typical examples of capitalized costs within a company?

    Learn examples of company capitalized costs, including expenses incurred to put fixed assets, software development costs, ... Read Answer >>
  6. What is the prime cost formula?

    Prime costs are the costs directly attributed to the production of a product. Before calculating prime costs, direct costs ... Read Answer >>
Trading Center