Fixed Costs and Capacity - A Market Approach

Dan Weiss
University of California, Davis

Abstract: This paper offers a market approach for extending the conceptual foundations of management accounting. The focus is on effects of market conditions and managers’ choices on cost behavior, rather than the traditional technological point of view. A model of cost adjustments is used as a vehicle to offer a market-based definition for fixed costs and a quantitative measure for practical capacity. The new definition for fixed costs is shown to generalize previous definitions in a meaningful way. It sheds light on the inappropriateness of the fixed-variable costs dichotomy in cost measurement systems, and highlights the distinction between sunk costs and fixed costs. The paper integrates the notions of fixed costs and practical capacity, emphasizing decision-making and control implications of technological and marketing constraints.

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