An Empirical Analysis of Capacity Costs
January 2017
Working Paper Number:
CES-17-26
Abstract
A central premise of management accounting is that including the cost of unused capacity in product costs can distort these costs and misguide users. Yet, there is little large-scale empirical evidence on the materiality of the cost of unused capacity. This study uses a confidential Census sample of 151,900 U.S. manufacturing plants from 1974-2011 to investigate the impact of separating the cost of unused capacity. We find that excluding the cost of unused capacity increases operating profit margins by approximately 26 percent. This order of magnitude is economically significant, and is pervasive across industries and over time. In additional analyses, we find that separating the cost of unused capacity largely smooths the time-series variation in unitized product costs and profit margins. Our finding of higher mean and lower variation of adjusted margins should be of considerable interest to both investors and managers.
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demand,
estimation,
production,
utilization,
quarterly,
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earnings,
financial,
efficiency,
accounting,
expenditure,
depreciation,
inventory,
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Annual Survey of Manufactures,
Bureau of Labor Statistics,
Longitudinal Research Database,
Center for Economic Studies,
Total Factor Productivity,
Fabricated Metal Products,
Center for Research in Security Prices,
Duke University
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