Unavoidable cost

Definition

An unavoidable cost is an expense that will remain regardless of any decision made in the short-term. These costs are not relevant to specific business decisions because they cannot be avoided or eliminated.

5 Must Know Facts For Your Next Test

1. Unavoidable costs are also known as sunk costs or committed costs.
2. These costs should not influence decision-making because they do not change between alternatives.
3. Examples of unavoidable costs include long-term lease payments and depreciation on equipment.
4. Unavoidable costs differ from avoidable costs, which can be eliminated if a particular decision is made.
5. In short-term decision making, focusing on relevant (avoidable) costs rather than unavoidable ones leads to better decisions.

Review Questions

• Why should unavoidable costs be excluded from short-term decision-making processes?
• What is an example of an unavoidable cost in a business setting?
• How do unavoidable costs differ from avoidable costs?

Related terms

Sunk Cost: A past expense that has already been incurred and cannot be recovered.

Relevant Cost: A future cost that varies depending on the decision being made.

Fixed Cost: An expense that does not change with the level of production or sales volume.