Product Costing and Investments in Shared Technology

Abstract

We analytically model a setting in which two product centers share a manufacturing process, the issue being to assign the shared costs in a way that induces rational product center managers to truthfully report private information needed for an ex-ante best investment decision. The shared service in our model is characterized by stochastic demand and processing times; investment in it is a function of the level of statistical process control achieved; and our product center managers are primarily concerned with getting the best trade-off between economies of scope and reduced manufacturing lead times (lower delay costs). We are particularly interested in the situation when a product center's report on its delay cost parameter is based on private information that is poor or non-existent. It is found that in this case, a product center in our model would always prefer to invest at a weakly higher level than its cost information justifies. This could provide one formal explanation of observations (Lee 1996; Foster and Horngren 1988) that investments in advanced manufacturing technology (specifically flexible manufacturing) often require non-accounting justification, i.e., are higher than the accounting numbers alone would warrant.

JEL Classification: M40, M46, G31