Planning fixed overhead costs is similar to planning variable overhead costs—only spend on essential activities and be efficient. But there is an additional strategic issue when planning fixed overhead costs: choosing the appropriate level of capacity or investment that will benefit the company in the long run. Consider Webb’s leasing of sewing machines, each of which has a fixed cost per year. Leasing too many machines will result in overcapacity and unnecessary fixed leasing costs. Leasing too few machines will result in an inability to meet demand, lost sales of jackets, and unhappy customers. Consider AT&T, which did not initially foresee the iPhone’s appeal or the proliferation of “apps” and consequently did not upgrade its network sufficiently to handle the resulting data traffic. AT&T subsequently had to impose limits on how customers could use the iPhone (such as by curtailing tethering and the streaming of Webcasts). This explains why, at one point following the iPhone’s release, AT&T had the lowest customer satisfaction ratings among all major carriers.
The planning of fixed overhead costs differs from the planning of variable overhead costs in another regard as well: timing. At the start of a budget period, management will have made most of the decisions determining the level of fixed overhead costs to be incurred. But it’s the day-to-day, ongoing operating decisions that mainly determine the level of variable overhead costs in a period. For example, the variable overhead costs of hospitals, which include the costs of disposable supplies, doses of medication, suture packets, and medical waste disposal, are a function of the number and nature of procedures carried out, as well as the practice patterns of the physicians. However, most of the costs of providing hospital service are fixed overhead costs—those related to buildings, equipment, and salaried labor. These costs are determined at the start of a period and are unrelated to a hospital’s volume of activity.*