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

24 Pages Posted: 21 Jul 2001

See all articles by Ramji Balakrishnan

Ramji Balakrishnan

University of Iowa - Department of Accounting

Shyam Sunder

Yale University - School of Management; Yale University - Cowles Foundation

Shiva Sivaramakrishnan

Rice University

Multiple version iconThere are 2 versions of this paper

Date Written: May 2001

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.

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

JEL Classification: L21, M21, M40, M46

Suggested Citation

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: https://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)

Shyam Sunder

Yale University - School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6160 (Phone)

HOME PAGE: http://www.som.yale.edu/faculty/sunder/

Yale University - Cowles Foundation

Box 208281
New Haven, CT 06520-8281
United States

Shiva Sivaramakrishnan

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
1,004
Abstract Views
8,404
rank
21,518
PlumX Metrics