Comment And Reply

comment and reply on the following two responses from my peers, 110 words for each.

1. I do not agree with the fact that the difference between practical capacity and master-budget capacity utilization is the best measure of management’s ability to balance the costs of having too much capacity and having too little capacity because , the difference is classified as the planned unused capacity and this approach is used for performance evaluation. T he costs of having too much capacity and having too little capacity involve revenue opportunity potentially forgone as well as cost of money tied up in plant assets.

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The cost of unused capacity is more frequently used to characterize resource usage. Flexible manufacturing systems (FMS), where the machining methods, machine tools, handling equipment, control systems and computer systems are used in an integrated way, become rather complex. Under these circumstances the process of production planning turns into a more complicated one, and as a consequence of the high value of the resources the drive for decreased cost of unused capacity is significant. If the cost of unused capacity is considered in capacity planning, the idle time of valuable resources can be exploited more efficiently.

2. Practical capacity represents an operating proficiency that is attainable in the sense that it accounts for variables such as machine repairs or operating delays due to pandemics and holidays. By utilizing practical capacity, you are factoring in risks that could ultimately delay production and damper results, and by doing so implementing a more realistic production level cap.

Master-budget capacity on the other hand encompasses the goals of the future period(s). It is a company’s projected level of capacity utilization for a period of time in the future.

When it comes to balancing the costs of having too much or too little capacity, I do not agree that taking the difference of the aforementioned utilization methods is a proficient one, because you have to take into account a company’s ability to generate or lose contracts, as well as investments in assets (such as technology). If a company were to lose a contract for future business, that would ultimately have an effect on the master-budget as the company’s capacity utilization budget would then be inflated, but to what extent? The master budget’s headcount, as well as labor hours and production units would become unattainable if the company were to lose the contract for future business, but the volume of the lost contract prevents the 1:1 offset by the factored-in  compensations for unavoidable variables within the practical capacity utilization.

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