Levelized Product Cost: Concept and Decision Relevance

Abstract

ABSTRACTWe examine a life-cycle cost concept that applies to both manufacturing and service industries in which upfront capacity investments are essential. Borrowing from the energy literature, we refer to this cost measure as the Levelized Product Cost (LC). Per unit of output, the levelized cost aggregates a share of the initial capacity investment with periodic fixed and variable operating costs. We relate this cost measure to the notion of full cost, as commonly calculated in managerial accounting texts. Our analysis identifies conditions under which the LC can be interpreted as the long-run marginal product cost. In particular, the LC is the relevant unit cost that firms should impute for investments in productive capacity.