What is the Concept of Avoidable Fixed Cost?
In order to understand the concept of avoidable fixed cost, it is important to understand the following two concepts,
- Avoidable Cost
- Fixed Cost
What Is an Avoidable Cost?
Avoidable cost in simple terms is a concept of avoiding a cost of a business by avoiding a particular business activity and thereby restricting the expense incurred pertaining to that business activity. Avoidable costs can be either avoidable fixed cost or avoidable variable cost. However, variable costs are more popularly named as avoidable cost as it has more scope and area of opportunities. Though the avoidance of fixed cost is less likely to happen, it is also very crucial for the overall growth and revenue improvement of the business.
Avoidable costs are more popular among the business which involve multiple product lines as the business manager will be keen on cutting-down or eliminating the non-performing or underperforming product lines and remove the cost associated with the product lines unnecessarily burdening the company. Business analysis, managers and companies focusing on avoidable costs regularly are more likely to prevent financial distress or overcome a financial distress.
What is Fixed Cost?
The costs that won’t increase or decrease with respect to the increase of goods or services provided or sold are defined as Fixed Cost. A company often had to bear the fixed costs irrespective of the business activity happens or not. Also, Fixed costs are more likely to be an indirect expense of the company and do not depend on the company’s production or performance. Fixed costs added to the variable costs will constitute the total cost of the company.
Some of the examples of fixed cost include office rent, interests on loans and etc.
Avoidable Fixed Cost
Avoidable fixed costs are costs that won’t change over a period of time and can be avoided without any consequences. For instance, a business manager can decide to cut-down on unused infrastructural expenses that the company is bound to pay even when there’s no business activity or production commencing on that division.
Many business analysts tend to focus on methods to eliminate or cut-down on the fixed costs that are avoidable and won’t impact the regular business activity or revenue of the business. Crucial expenses like overhead costs will not come under avoidable fixed costs as it will directly impact the overall or important business activities. Overhead costs generally include rent, insurances and transportation etc. Unless, the overhead costs of a certain business unit that isn’t generating any revenue or productivity, the overhead costs will never come under the avoidable fixed costs.
Fixed costs that can also be avoided by opting for an alternative strategy or opportunity that would help reduce the cost compared to the existing one. For instance, a company can decide to cut down on a product line involving huge expenses such as employee salaries, infrastructure and transportation by choosing a less expensive automation product line which won’t cost that much to the company.
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