Avoidance Cost Definition
The term “avoidance cost” is used in business and accounting to refer to the costs incurred to avoid future events or problems. These costs can be financial, such as the cost of investing in new equipment to avoid future production problems, or they can be non-financial, such as the cost of training employees to avoid future accidents.
Avoidance costs are important to consider when making business decisions because they can have a significant impact on the bottom line. For example, a company may decide not to invest in new equipment because the upfront cost is too high. However, if that decision results in production problems down the road, the resulting losses could far exceed the cost of the new equipment.
Similarly, a company may decide not to train its employees on safety procedures because it believes the training is unnecessary and will be a waste of time and money. But if an accident occurs and someone is injured, the company could be liable for damages that far exceed the cost of the training.
In short, avoidance costs are those costs that are incurred to prevent future events or problems from occurring. They can be financial or non-financial in nature, and they should be considered carefully when making business decisions.
