For Better Decisions, Stop Assigning Fixed Costs!

Management errors in decision making have many sources, but errors rooted in conceptual confusions are persistent. An example is costs; difficulties arise when an organisation allocates fixed costs to product lines before assessing their profitability. Large, non-profit maximising organisations, such as universities, with a high ratio of fixed to variable costs, are particularly at risk. When key performance indicators for managers also conflate costs of different types, management of resources can go awry. Compounding the issue, economics textbooks offer contradictory definitions of, and distinctions between, costs. This paper clarifies the conceptual confusions surrounding costs to highlight the fixed cost trap in the university sector.