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Are Physical Capacity Constraints Relevant?: Applying Finance†Economics Theory to a Management Accounting Misconception

Author

Listed:
  • Terry Black

    (School of Accountancy, Queensland University of Technology, PO Box 2434, Brisbane 4001 Australia. Tel: (07) 3864 4316; fax: (07) 3864 1812; email: l.gallagher@qut.edu.au)

  • Lynn Gallagher

    (Department of Accounting and Finance, James Cook University, Townsville, North Qld, Australia.)

Abstract

The management accounting literature presents a view that firms normally operate at full physical capacity and consequently often cannot meet customer demand which results in the frequent rejection of profitable business. The finance†economics literature presents a contrary view that firms, seeking to maximise their value, will plan for sufficient physical capacity to meet all profitable business. Finance†economics theory predicts that firms will have spare capacity since economic constraints apply before physical constraints become relevant. This paper presents the results of an empirical study of Australian manufacturing firms which supports the finance†economics view.

Suggested Citation

  • Terry Black & Lynn Gallagher, 1999. "Are Physical Capacity Constraints Relevant?: Applying Finance†Economics Theory to a Management Accounting Misconception," Australian Journal of Management, Australian School of Business, vol. 24(2), pages 143-158, December.
    • Handle: RePEc:sae:ausman:v:24:y:1999:i:2:p:143-158
    DOI: 10.1177/031289629902400204
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    References listed on IDEAS

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