Abandonment cost
Abandonment costs are costs associated with the abandonment of a business venture. This was traditionally an oil and gas term that referred to the abandonment of an under-producing or non-producing oil well. Such costs are specified in the authority for expenditure (AFE). In the oil and gas context, it includes all the costs necessary to shut the well down and abandon it, including costs for:
- removal of equipment
- plugging of the well with cement
- any environmental clean up, etc.
It is occasionally referred to as "Removal and Abandonment" or R & A.
However, it has been broadened from its original context to include the abandonment of other business ventures, primarily in manufacturing. It is often used in a cost-benefit analysis to determine if a marginal venture should be continued or if it is more financially beneficial to abandon the venture and plow the remaining money into something else in an attempt to recoup the losses. For example, General Motors will have some abandonment costs from shutting down the Pontiac and Saturn brands.
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