Managerial Accounting

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Avoidable cost

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Managerial Accounting

Definition

Avoidable cost is an expense that can be eliminated if a specific decision is made. These costs are relevant to short-term decision-making and help in determining the financial impact of different choices.

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5 Must Know Facts For Your Next Test

  1. Avoidable costs are only incurred if a particular action is taken, making them relevant for decision-making.
  2. They differ from unavoidable costs, which cannot be eliminated regardless of the decision made.
  3. Examples include direct materials, direct labor, and variable overheads tied to a specific product or service.
  4. Identifying avoidable costs helps managers make informed decisions about discontinuing products or services.
  5. They play a crucial role in cost-benefit analysis during short-term planning.

Review Questions

  • What differentiates avoidable costs from unavoidable costs?
  • How do avoidable costs influence short-term decision-making?
  • Can fixed costs ever be considered avoidable? Give an example.

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