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Capacity Costs: Evidence from Census Data

Author

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  • Rajan, Madhav V.

    (Stanford University)

  • Ederhof, Merle
  • Nagar, Venkatesh

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.

Suggested Citation

  • Rajan, Madhav V. & Ederhof, Merle & Nagar, Venkatesh, 2016. "Capacity Costs: Evidence from Census Data," Research Papers 3416, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3416
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    File URL: http://www.gsb.stanford.edu/faculty-research/working-papers/capacity-costs-evidence-census-data
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