Economics is an essential component of world trades. Trading and setting up a business require a lot of calculations and negotiations so that the breakeven point can be reached by the venture as soon as possible. At the time of incorporation, avoidable costs and unavoidable costs are calculated efficiently so that the new company does not plunge into losses after some time.
Avoidable Cost vs Unavoidable Cost
The main 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.
Avoidable cost can be defined as the non-necessary cost. The firm can easily substitute these or plan to make this payment at a later time. 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. This is because the existence of the venture is dependent on these costs in all ways. At times, these costs are done away with by taking hefty loans from time to time.
Comparison Table Between Avoidable Cost And Unavoidable Cost
| 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 the 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 avoidable costs. | No alternatives are available for cutting down on unavoidable costs in any way. |
What is Avoidable Cost?
Avoidable cost is that amount which 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. The balance is strikingly turbulent due to the subjectivist approach taken by the market.
Avoidable cost and some related expenditure parameters can easily be controlled by switching to alternatives. On the other hand, stricter policy regulations might also help in case the economy is down at a particular point in time. If the firm is not in working condition, the salaries of new employees can easily be avoided by sending them on unpaid leaves. Insurance also comes under the umbrella of avoidable costs.
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. On the other hand, the variable costs fluctuate significantly as the amount produced is increased or decreased. These variables also follow the law of demand and supply.
What is Unavoidable Cost?
Unavoidable cost means that expenditure which a company has to incur irrespective of alternatives of policy changes. No other solution is available since these costs are crucial to the existence of the firm and also aid in smooth functioning. For instance, if a company manufactures soaps, the packaging is counted under unavoidable costs since those soaps cannot be sold without the packing, even if all-inclusive.
Unavoidable cost is free from any changes made due to change in decisions related to the firm. Rent is one of the most common examples of unavoidable costs. 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. Therefore, this recovery also acts as a litmus test for recognizing the unavoidable cost for any firm. Other parameters include market share and history of payments.
Main Differences Between Avoidable Cost And Unavoidable Cost
- Avoidable cost is the optional amount to be paid by a firm while unavoidable cost is to be paid compulsorily.
- The duration for which the firm is affected by avoidable costs is smaller in comparison to that of unavoidable costs.
- While planning the annual budget, the relevance of avoidable costs is higher than that of unavoidable costs.
- The further broad classifications of avoidable cost are fixed and variable. Sunk cost is a type of unavoidable cost.
- Avoidable cost has greater alternatives than unavoidable costs.
Conclusion
In workplaces as well as households, expenditure needs to be regulated as per the budget. If the calculations do not match the actual data, one should focus more on the documentation process. Choosing between avoidable and unavoidable costs might be based on immediate necessities as well as long-term benefits. For instance, cost-effective products are bought at higher rates than immediate necessities to makes sure the satisfaction of needs is not delayed beyond a particular period.
Gratification also plays an important role in the maintenance of a fixed financial policy. The size of a venture does not matter as far as the income and expenditure are balanced monthly. In case of emergencies and some unavoidable purchases, the budget might get disturbed beyond imaginable proportions. This can also be balanced by raising the bar of monthly or yearly savings for a longer period. It is best to delegate such work to an accountant so that no risks are incurred in finances.
References
- https://www.mdpi.com/1660-4601/7/7/2881
- https://www.sciencedirect.com/science/article/pii/S0196890402000122