When is a company allowed to eliminate costs?
If a manager decides to fire an inefficient worker, collective bargaining will inhibit his will; if economic outlook shows that a business line doesn’t provide goods for a relevant market share, managers won’t be allowed to eliminate the relative machineries, because strategic decisions are unchangeable in the short term: these all are clear examples of sunk costs.
Sunk costs are often related to evaluation of external costs due to purchases for outsourcing policy (http://www.questidenari.com/?p=218), and everybody understands easily that manufacturing a product is cheaper than buying (“make or buy” decisions). So, what about increasing external variable costs after having cut (a minimal percentage of) internal fixed and variable costs?
No written rules for all these questions. A clever controller, before creating an effective cost accounting system (http://www.questidenari.com/?p=611), must be a good communicator, because he has to talk to every person working in his company, blue collar or white collar: that’s the only way to know and assess costs, and the first step for an accurate analysis.