Avoidable costs
In one sentenceCosts that disappear if the business takes a particular decision, such as closing a branch or stopping a product; they are the ones that matter in the comparison.
Simply put
When you consider stopping an activity, ask about each cost: will it really disappear if I stop? What disappears is avoidable.
The branch's share of general administrative expenses, however, usually remains even if you close it, so do not count it as a saving.
Worked example
A restaurant chain is studying closing a branch that shows a loss in the books; its monthly gross profit is 36,000 SAR.
Branch salaries (disappear on closure)30,000 SAR
Branch rent (the contract can be canceled)10,000 SAR
Its share of administrative expenses (do not disappear)8,000 SAR
Gross profit that will be lost36,000 SAR
Effect of closure = (30,000 + 10,000) − 36,0004,000 SAR monthly saving
Formula: Avoidable costs − revenue or profit that will be lost
Don't confuse it with
Sunk costSunk costs were paid in the past and cannot be recovered by any decision, while avoidable costs have not yet been spent and can be stopped.