Economics is an essential component of world trade. Trading and setting up a business require a lot of calculations and negotiations so that the venture can reach the breakeven point as soon as possible.
- Avoidable costs are expenses that can be eliminated if a specific activity or decision is changed, while unavoidable costs will be incurred regardless of the decision made.
- Avoidable costs are relevant for decision-making, as they help determine the potential savings from altering an activity or project.
- Unavoidable costs are irrelevant for decision-making, as they cannot be altered by changing activities or projects.
Avoidable Cost vs Unavoidable Cost
The difference between Avoidable Cost and Unavoidable Cost is that the former can be cut down by using budgetary means while the latter is inevitable. In other words, the complete elimination of avoidable costs is possible, while unavoidable costs cannot be eliminated in the slightest form. Discontinuation of related businesses does not affect the means of production.
This implies that avoidable costs come with two possibilities – complete negation and partial negation. Reallocation is another means of dealing with such costs.
Unavoidable cost can be defined as the inevitable cost. No venture can prosper without assigning a vital portion of the budget to unavoidable costs.
|Parameters of Comparison||Avoidable Cost||Unavoidable Cost|
|Definition||It is defined as the cost that can be saved by not indulging in a specific task.||It is defined as the cost that will be incurred mandatorily, whether the task is performed or not.|
|Duration||They are helpful only in the short run.||The prospects of unavoidable costs pay in the long run.|
|Relevance in Budget||It has high relevance since reducing expenditures is possible.||The budget is not affected by unavoidable costs in any way.|
|Other Subdivisions||Fixed costs and variable costs are types of avoidable costs.||Sunk costs are akin to unavoidable costs.|
|Alternative Options Available||Some cheap alternatives can substitute for avoidable costs.||No alternatives are available for cutting down on unavoidable costs in any way.|
What is Avoidable Cost?
Avoidable cost is the amount that the company can save by canceling the cause that leads to that particular expenditure. This is easier said than done since most companies take avoidable and unavoidable costs together while calculating the expenditure.
Avoidable costs and some related expenditure parameters can easily be controlled by switching to alternatives. On the other hand, stricter policy regulations might also help if the economy is down at a particular time.
Avoidable cost is mainly of two types – fixed costs and variable costs. Fixed costs stay unaffected irrespective of the modifications made in the production capacity or other factors.
What is Unavoidable Cost?
Unavoidable cost means the expenditure a company has to incur irrespective of alternatives of policy changes. No other solution is available since these costs are crucial to the firm’s existence and aid in smooth functioning.
This notion leads many ventures to begin slowly since the natural resources are not adequate to sustain the workers until the new venture reaches breakeven. Once that point of optimum production is reached, the unavoidable costs become a normal part of the budget.
Unavoidable costs can be compared to the salary that is predesignated for managers. On the other hand, sunk costs also play a crucial role. Since they have already been spent, there is no possible mode of recovery.
Main Differences Between Avoidable Cost And Unavoidable Cost
- The further broad classifications of avoidable costs are fixed and variable. Sunk cost is a type of unavoidable cost.
- The avoidable cost has greater alternatives than unavoidable costs.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.