Management Accounting Section Midyear Meeting

Capacity Planning with Limited Information

• In Event: Analytical Models I

Abstract

We examine how limitations in the information available to a firm affect the efficacy of its capacity planning decision. This examination underscores the importance of the capacity planning decision in terms of its ability to affect realized profit. A key finding is that the loss arises more because of the composition of spending than the level of spending on capacity resources. More important, our work shows the complex nature of interactions between the various kinds of limitations in available information. Our work shows that sequential refinement of one aspect of errors might be harmful, particularly when other sources of error are in the "intermediate" range. Moreover, the negative interaction in errors means that the demand for cost system sophistication (in terms of the number of cost pools) declines as the candidate firm begins to resemble the "average" firm in the industry (i.e., specification error, specified in terms of how shared industry knowledge maps to the firm’s individual setting, declines).

Authors

• Vic V Anand, University of Illinois at Urbana-Champaign

• Ramji Balakrishnan, University of Iowa