On the Efficiency of Cost-Based Decision Rules for Capacity Planning
Posted: 13 Jul 1998
Date Written: December 1995
Abstract
Recent literature on activity based product costing suggests that using product costs to make long-run product and capacity planning decisions is economically sound. This conclusion relies on the assumption that capacity resources impose "soft" constraints (i.e., capacity can be increased in the short-run on an as-needed basis). However, many capacity resources impose "hard" constraints (i.e., capacity once installed cannot be changed in the short run). In this paper, we explore the economic loss from using product cost information for capacity planning when capacity constraints are hard. We also examine two other capacity planning rules that adopt an input resource-based perspective to planning capacity. Using simulation experiments, we show that the solution from a "bottleneck planning" approach dominates the "product cost" based solution and, provides an excellent approximation to the optimal solution to the capacity planning problem.
JEL Classification: M41, D24
Suggested Citation: Suggested Citation