An Empirical Analysis of Capacity Costs

Merle Ederhof, Venky Nagar and Madhav Rajan

Working Papers from U.S. Census Bureau, Center for Economic Studies

Abstract: A central premise of management accounting is that including the cost of unused capacity in product costs can distort these costs and misguide users. Yet, there is little large-scale empirical evidence on the materiality of the cost of unused capacity. This study uses a confidential Census sample of 151,900 U.S. manufacturing plants from 1974-2011 to investigate the impact of separating the cost of unused capacity. We find that excluding the cost of unused capacity increases operating profit margins by approximately 26 percent. This order of magnitude is economically significant, and is pervasive across industries and over time. In additional analyses, we find that separating the cost of unused capacity largely smooths the time-series variation in unitized product costs and profit margins. Our finding of higher mean and lower variation of adjusted margins should be of considerable interest to both investors and managers.

Pages: 62 pages
Date: 2017-01
New Economics Papers: this item is included in nep-eff
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Citations: View citations in EconPapers (1)

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https://www2.census.gov/ces/wp/2017/CES-WP-17-26.pdf First version, 2017 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:cen:wpaper:17-26

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