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

Balachandran, Bala and Balakrishnan, Ramji and Sivaramakrishnan, Shiva, On the Efficiency of Cost-Based Decision Rules for Capacity Planning (December 1995). Available at SSRN: https://ssrn.com/abstract=2554

Bala Balachandran (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-2678 (Phone)
847-467-1202 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/Faculty/Directory/Balachandran_Bala.aspx

Ramji Balakrishnan

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)

Shiva Sivaramakrishnan

Rice University ( email )

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

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