Now that I have your attention. The question is largely irrelevant. The real questions about fixed and variable (RCA uses the term proportional) costs should be:
1. Are they avoidable or unavoidable for the decision at hand?
2. What is the nature of my market and my risk tolerance?
Question 1: Avoidability is the decision support perspective on resources and associated costs. Depending on the nature of the decision, both fixed and variable costs can be either avoidable or unavoidable. Consider some examples:
Example 1: A manufacturing company decides to replace an old extrusion line with modern equipment. This results in a significant reduction in the amount of maintenance required. The maintenance manager realizes that he can reduce his total maintenance capacity by 8,000 hours, the equivalent of a whole crew including the crew's supervisor and workspace.
The supervisor’s salary is a fixed cost because his/her activity is not tied to the level of maintenance activity. This fixed cost is avoidable.
The technicians’ salaries are a variable cost because their activity is tied to the level of maintenance activity This variable cost is avoidable.
The workspace is a fixed cost. It is not avoidable because of this decision, but an additional decision to modify a lease, rent the space, or release a rented storage space and use the workspace may allow some cost avoidance.
Example 2: The same company receives an offer from an outside vendor to take over the maintenance & repair of extrusion rollers. The manager knows from his RCA system that the company spends 2,400 hours per year on these activities. A maintenance technician works 1,600 productive hours per year.
The technicians’ salaries are a variable cost because their activity is tied to the level of maintenance activity. One technician’s salary is avoidable – 1,600 hours. The second technician’s salary is unavoidable, assuming it is not reasonable to cut hours or hire a part-time technician. If reducing hours is an alternative, then 800 hours could be avoidable.
Question 2- What is the nature of my market and my risk tolerance? Fixed resources and costs create leverage. These means that when business is good and the resources that generate the costs are in full use, profits can be very large. When business is bad and fixed resources cannot be trimmed, profits can be meager or nonexistent.
Variable resources and costs tend to increase or decrease with business volume. This tends to create a more stable level of profitability if a business can quickly adjust resources to business volume. Few businesses can avoid some level of fixed resources and costs.
Conclusion: RCA tracks the nature of resource use and costs as fixed or proportional (the word RCA prefers over variable) as they are consumed in processes. This applies the concept of Responsiveness as established in the IMA Conceptual Framework for Managerial Costing. This means marginal profit, revenue, and cost information is readily available for decisions with RCA.
RCA is the only costing approach that provides clear insight into the changing nature of costs in processes. What does this mean? Variable or proportional costs can become fixed based on their use and consumption in processes. RCA shows how that happens. I’ll leave the detailed discussion for another day…..but many management accounting authors have observed that fixed costs have a “snowball” effect and grow rapidly within an organization.