Avoided Cost
Avoided cost, abbreviated as AC, is the expenses that a business or individual saves by not engaging in a particular activity or by avoiding a specific course of action. It represents the costs that would have been incurred if the activity had been pursued but were ultimately avoided.
avoided costs can include
- Operational Cost - These are costs that a business would have incurred if it had pursued a certain operation or activity. By avoiding the activity, the business saves money on expenses such as labor, materials, utilities, and maintenance.
- Environmental Cost - In environmental economics, avoided costs often refer to the expenses that are saved by preventing environmental damage or pollution. For instance, implementing measures to reduce pollution can lead to avoided costs associated with health care, environmental cleanup, and damage to natural resources.
- Transaction Cost - Avoided costs can also include the expenses that would have been incurred in completing a transaction or dealing with a particular situation. For example, avoiding a legal dispute can save costs related to legal fees, court proceedings, and settlements.
- Capital Cost - Businesses may avoid certain capital investments or projects to save costs associated with purchasing equipment, buildings, or infrastructure.
Understanding avoided costs is used in decision making processes, as it allows businesses and individuals to assess the financial benefits of alternative courses of action. By considering avoided costs, entities can make more informed choices and allocate resources efficiently.
Avoided cost Formula |
| \( AC = ARC + PL - PMC \) |
| Symbol |
| \( AC \) = avoided cost |
| \(ARC \) = assumed repair cost |
| \( PMC \) = preventive maintenance cost |
| \( PL \) = production losses |
