Accounting for the Cost of Unused Capacity in an Economic Downturn

Companies' Responses to SFAS 151

Benjamin P. Foster, PhD, CPA, CMA, and Sidney J. Baxendale, PhD, CPA, CMA

An overarching goal of financial accounting is to provide useful information to a company's external stakeholders, including equity investors, potential equity investors, lenders, potential lenders, and others. Inventory accounting is particularly important for manufacturing companies. Differing opinions on which type of information about inventories is most useful to stakeholders has led to variations in accounting standards across the globe. As part of an effort to improve the comparability of financial reporting worldwide, FASB and the IASB have moved to eliminate narrow differences in their standards. One consequence of this effort was Statement of Financial Accounting Standards (SFAS) 151, Inventory Costs (Accounting Standards Codification [ASC] 330-10-30, paras. 1–8), effective for fiscal years ending after June 15, 2005.