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

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.

Number of Pages in PDF File: 24

Keywords: Opportunity Cost, Resource Management, Time-Based Costing, Resource Granularity, Decision-Making

JEL Classification: L21, M21, M40, M46

working papers series