Is the Opportunity Cost of Idle Capacity Zero? Coase (1938) Versus Managerial Accounting Circa 2000
Ramji Balakrishnan The
University of lowa
K. Sivaramakrishnan
Texas A&M University
Shyam Sunder Yale
University
Revised:December 2001
© 2001. All rights reserved. Contact authors at ramji-balakrishnan@uiowa.edu, shiva@cgsb.tamu.edu, or shyam.sunder@yale.edu.
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 refer to repair, overhaul, employee vacation and congestion giving rise to 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 cost. JEL Codes: L2, M21, M41
Keywords Opportunity cost, Resource management, Time-based costing, Resource granularity, decision-making.
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