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.
Balakrishnan, Ramji and Sunder, Shyam and Sivaramakrishnan, Shiva, Is the Opportunity Cost of Idle Capacity Zero? Coase (1938)
Versus Managerial Accounting Circa 2000 (May 2001). Yale SOM Working Paper No. AC-09. Available at SSRN: http://ssrn.com/abstract=275497 or http://dx.doi.org/10.2139/ssrn.275497
Ramji Balakrishnan (Contact Author)
University of Iowa - Department of Accounting ( email )
108 Pappajohn Business Building Iowa City, IA 52242-1000 United States 319-335-0958 (Phone) 319-335-1956 (Fax)