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Is the Opportunity Cost of Idle Capacity Zero? Coase (1938) Versus Managerial Accounting Circa 2000

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  • Ramamurthy oRamjio Balakrishnan

    () (University of Iowa, Henry B. Tippie College of Business)

  • K. Sivaramakrishnan

    () (Department of Accounting)

  • Shyam NMI Sunder

    () (School of Management)

Abstract

Many accounting textbooks state that the opportunity cost of idle fixed assets is zero. A few exceptions may refer to factors such as repair and overhaul, employee vacation and congestion that give rise to strictly positive opportunity cost. We show that in important and frequently encountered situations, idled assets have positive opportunity cost arising from extension of their useful life. We also present a simple framework to help managers identify such situations and correctly assess opportunity costs.

Suggested Citation

  • Ramamurthy oRamjio Balakrishnan & K. Sivaramakrishnan & Shyam NMI Sunder, 2001. "Is the Opportunity Cost of Idle Capacity Zero? Coase (1938) Versus Managerial Accounting Circa 2000," Yale School of Management Working Papers ysm210, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm210
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    Keywords

    Opportunity Cost; Resource Management; Time-Based Costing; Resource Granularity; Decision-Making;

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm

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