4. Rational" allocation of fixed costs

4.1 The need for rational imputation

In all the foregoing, we have assumed that the level of activity during the period was "normal", i.e. that the company was neither under- nor over-active. However, the company may be going through difficult economic times (economic crisis, "technical unemployment"), or may have been over-optimistic, investing too much or over-sizing a production facility that ends up being under-utilized. In such cases, we need to reintroduce the variable/fixed costs distinction, and treat fixed costs specifically, otherwise we end up with aberrant full costs,...