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Costing Systems and the Spare Capacity Conundrum: Avoiding the Death Spiral

dc.contributor.authorBates, Ken
dc.contributor.authorBradshaw, John
dc.date.accessioned2012-05-01T02:53:49Z
dc.date.accessioned2022-07-05T02:32:37Z
dc.date.available2012-05-01T02:53:49Z
dc.date.available2022-07-05T02:32:37Z
dc.date.copyright2011
dc.date.issued2011
dc.description.abstractWe hear how firms have to become lean, eliminate non-value added activities and strive to maximise asset utilisation, but there are inevitably firms with excess capacity that need relevant information to manage the cost of the under utilisation of resources. In this paper we question whether cost system designers have been taking appropriate account of the capacity issue, and ask whether the costing systems employed are sufficiently adaptable for fluctuating levels of capacity utilisation. We note that the capacity issue has received diminishing attention in the literature since the 1960s, and identify the dangers of not identifying the cost of spare capacity. We demonstrate how improper cost system design or usage can draw the firm into the death spiral. This danger not only exists when moving into a recession but also when recovering and resuming growth. We describe two cases that demonstrate potential pitfalls and alternative approaches to the capacity issue. The manufacturing case is an SME with a traditional costing system that was hindering management‟s pricing and product mix decisions. Fortunately the death spiral was avoided as it was recognised that significant spare capacity was distorting costs and prices when the firm continued to base overhead absorption on budgeted production volumes. The service case relates to a large financial services company that implemented a complex activity based costing system and gained a much greater understanding of resource consumption and capacity utilisation, and hence established more effective cost control in their back office operations.en_NZ
dc.formatpdfen_NZ
dc.identifier.urihttps://ir.wgtn.ac.nz/handle/123456789/18648
dc.language.isoen_NZ
dc.publisherTe Herenga Waka—Victoria University of Wellingtonen_NZ
dc.relation.ispartofseriesWorking Paperen_NZ
dc.relation.ispartofseriesNo. 85en_NZ
dc.relation.urihttp://www.victoria.ac.nz/sacl/cagtr/working-papers/WP85.pdf
dc.subjectasset utilisationen_NZ
dc.subjectaccountingen_NZ
dc.subjectcapacityen_NZ
dc.titleCosting Systems and the Spare Capacity Conundrum: Avoiding the Death Spiralen_NZ
dc.typeTexten_NZ
vuwschema.contributor.unitCentre for Accounting, Governance and Taxation Researchen_NZ
vuwschema.contributor.unitSchool of Accounting and Commercial Lawen_NZ
vuwschema.subject.anzsrcfor150199 Accounting, Auditing and Accountability not elsewhere classifieden_NZ
vuwschema.subject.anzsrcforV2350199 Accounting, auditing and accountability not elsewhere classifieden_NZ
vuwschema.type.vuwWorking or Occasional Paperen_NZ

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