Capacity Costs: Evidence from Census Data

Madhav V. Rajan, Merle Ederhof and Venkatesh Nagar
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Madhav V. Rajan: Stanford University
Merle Ederhof: ?
Venkatesh Nagar: ?

Research Papers from Stanford University, Graduate School of Business

Abstract: Standard managerial accounting textbooks (see, e.g., Horngren et al., 2015, chapter 9; Kaplan and Atkinson, 1998, chapters 1 and 9; Cooper and Kaplan, 1991, chapter 3), case studies (see, e.g., 'Bridgeton Industries'; 'Micro Devices Division'; 'Schulze Waxed Containers'; 'Hewlett Packard: Queensferry Telecommunications Division'; 'Anagene, Inc.'), and qualitative manuscripts (see, e.g., Cooper and Kaplan, 1988, 1992; Kaplan, 1994) advocate for the cost of unused capacity to be excluded when calculating product costs. This instruction is also shared by US financial accounting standards (SFAS 151). The arguments for excluding unused capacity costs include a) avoidance of the so-called 'death spiral', and b) a reduction in the fluctuations of product costs and profit margins. While these arguments are widely accepted, they have not been empirically investigated in a systematic manner. This study fills this gap in the literature.

Date: 2016-04
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