Levelized Product Cost: Concept and Decision Relevance

52 Pages Posted: 11 Feb 2014

See all articles by Stefan J. Reichelstein

Stefan J. Reichelstein

Stanford University - Stanford Graduate School of Business; CESifo (Center for Economic Studies and Ifo Institute)

Anna Rohlfing-Bastian

Goethe University Frankfurt

Date Written: January 31, 2014

Abstract

This paper examines a life-cycle cost concept that applies to both manufacturing and service industries in which upfront capacity investments are essential. Borrowing from the energy literature, we refer to this cost measure as the levelized product cost (LC). Per unit of output, the levelized cost aggregates a share of the initial capacity expenditure with periodic fixed and variable operating costs. The resulting cost figure exceeds the full cost of a product, as commonly calculated in managerial accounting. Our analysis shows that the LC can be interpreted as the long-run marginal product cost. In particular, this cost measure is shown to be the relevant unit cost that firms should impute for investments in productive capacity.

JEL Classification: M200, M410, L110, L120

Suggested Citation

Reichelstein, Stefan J. and Rohlfing-Bastian, Anna, Levelized Product Cost: Concept and Decision Relevance (January 31, 2014). CESifo Working Paper Series No. 4590. Available at SSRN: https://ssrn.com/abstract=2393893

Stefan J. Reichelstein (Contact Author)

Stanford University - Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1129 (Phone)
650-725-7979 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Anna Rohlfing-Bastian

Goethe University Frankfurt

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60629
Germany

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