Fixed Costs need not be Fixed

by Ashok Kumar Kurup
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Brahmadatta, the Prime Minister of Suvarnapura kingdom approached King Suvarna, “Maharaj, we have a shortage of 10,000 gold coins in our revenues this year due to the famine in the Central province of the kingdom.” King Suvarna was worried and called for his trusted Guru and Advisor, Yogi Gunavan.

Upon his arrival, the King received him with reverence and led him to the palace for a discussion with his trusted ministers. After perusing the reports of receipt of taxes and accumulation of grains Gunavan asked,” Accumulating grains is costing us 10 gold coins per mound of grain. It is higher compared to earlier periods.” King Suvarna replied, “Guruji, earlier we used to cultivate grains in the East and West provinces. However, we were successful in cultivating grains in the hilly terrain of the North provinces increasing output by 25% from the previous year.”

Gunavan perused the reports again and asked, “Given that the cost of transport and storage has remained the same, why is it that our costs have increased by 34%?”. Brahmadatta replied, “Guruji, the cost of transporting grains from the hilly terrain is higher because our carts can only take smaller loads and hence, we need to hire more carts to transport the grains to our central granary in the Southern province.”

Gunavan said, “Do we still store all the grain in the central granary inside the Southern Fort?”. “Yes Guruji. We have increased the capacity for storage by moving some of the soldier barracks to the rear of the Fort.”, replied Brahmadatta.

Gunavan further asked,” Why do we store all the grains in the Southern Fort? Don’t we have Forts in the North, East and West now?”. King Suvarna replied,” We have been doing this since the time of my father and it was you who initiated this practice when you were the Prime Minister.” “That is right. Grains are precious and will be protected inside the Fort. But we only had one Fort during that period. Now we have 4 Forts. Can’t we store grains from these provinces in their respective Forts?”, Gunavan asked.

Everyone said in unison,” Guruji, that is a good idea! This way every Fort will have enough provisions and we need not transport grains from central granary to all Forts. This will bring down transportation costs both during accumulation and distribution.”

Brahmadatta conferred with his Revenue secretary and announced, “Maharaj, this should save us about 35,000 gold coins in transport and we would require 15,000 gold coins to set up 3 granaries. Net saving 20,000 gold coins!”

Gunavan then addressed everybody, “Noblemen, always remember our fixed costs are based on our practices and practices are based on assumptions. So always question your assumptions for the fixed costs and then fixed costs will no longer be fixed.”

Lessons Learned

1. Every Fixed cost is based on a practice and every practice is based on an assumption.

2. The Fixed Cost is budgeted but the practice and assumption are not.

3. Practices and their assumptions when not reviewed result in COPQ and waste. Hence, question the assumptions behind your practices periodically to ensure that fixed costs do not remain fixed.

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