Hence, managers can influence organizations’ cost behavior to a great extent. This paper will discuss capacity costs, committed fixed costs, and discretionary fixed costs in detail with reference to their current and future impact on business or society. Capacity costs Capacity costs can be simply referred to the fixed costs required for achieving predetermined level of production or meeting desired level of customer satisfaction without compromising product quality. Generally companies infrequently make strategic or capacity decisions because this process is highly complex and time consuming. Furthermore, an incorrect capacity decision may raise potential challenges to an organization’s market competitiveness. However, some well established corporation like Starbuck make capacity decision more frequently as part of their international expansion strategy. Janeba suggests that firms with long term demand variations must be more vigilant while setting their capacity costs as it is not easy to frequently alter the capacity cost structure. In times of unforeseen contingencies like economic downturns, there would be a significant fall in demand and therefore companies may struggle to recover fixed capacity costs fully. It must be noted that a capacity decision can have great influence on employees’ ethical commitment. A sound capital cost structure would assist an organization to keep its employment policy stable and thereby avoid employee terminations unless there are huge fluctuations in demand.
In addition, an effective capital cost decision may also benefit a corporation to keep itself away from reputation damaging activities including business downsizing. Committed fixed costs Sometimes, an organization may incur some additional costs even though it has taken measures to trim down fixed capacity costs. Such costs are called committed fixed costs. “Possession of facilities, equipment, and a basic organizational structure” contributes to committed fixed costs (given file). According to Baxendale, these costs may include long term interest payments, insurance property taxes, and mortgage and lease payments. While closely analyzing a business organization, it is clear that elimination of committed fixed costs would be an impossible task. However, a mounting committed fixed cost may raise serious threats to the company’s operational efficiency and thereby profitability; this situation would probably weaken the company’s chances of long term survival. Hence, managers have to adopt strategies for minimizing the organization’s committed fixed costs. In order to minimize these costs, it is necessary for managers to make notable changes in the organizational structure or scope of operations. However, it must be emphasized that a thoughtless change in the scope and scale of organizational activities would have an adverse effect on the company’s competitiveness. In short, an organization’s capacity decisions may greatly influence its level of committed fixed costs. Discretionary fixed costs Managers consider discretionary fixed costs as a tool to meet the organization’s goals and hence these costs are subject to some levels of fluctuations. Discretionary fixed costs do not have any direct relationship with the levels of activities or organizational productivity. In the view of Cooper and Kaplan, these costs include research and development