Activity capacity is the number of times an activity can be performed. Activity drivers measure activity capacity. For example, consider inspecting finished goods as the activity. A sample from each batch is taken to determine the batch’s overall quality. The demand for the inspection activity determines the amount of activity capacity that is required. For instance, suppose that the number of batches inspected measures activity output. Now, suppose that 60 batches are scheduled to be produced. Then, the required capacity is 60 batches. Finally, assume that a single inspector can inspect 20 batches per year. Thus, three inspectors must be hired to provide the necessary capacity. If each inspector is paid a salary of $40,000, the budgeted cost of the activity capacity is $120,000. This is the cost of the resources (labor) acquired in advance of usage. The budgeted activity rate is $2,000 per batch ($120,000/60).
Several questions relate to activity capacity and its cost. First, what should the activity capacity be? The answer to this question provides the ability to measure the amount of improvement possible. Second, how much of the capacity acquired was actually used? The answer to this question signals a nonproductive cost and, at the same time, an opportunity for capacity reduction and cost savings.
Capacity Variances
Exhibit 12-9 illustrates the calculation of two capacity variances: the activity volume variance and the unused capacity variance. The activity volume variance is the difference between the actual activity level acquired (practical capacity, AQ) and the value-added standard quantity of activity that should be used (SQ). Assuming that inspection is a non-
Several questions relate to activity capacity and its cost. First, what should the activity capacity be? The answer to this question provides the ability to measure the amount of improvement possible. Second, how much of the capacity acquired was actually used? The answer to this question signals a nonproductive cost and, at the same time, an opportunity for capacity reduction and cost savings.
Capacity Variances
Exhibit 12-9 illustrates the calculation of two capacity variances: the activity volume variance and the unused capacity variance. The activity volume variance is the difference between the actual activity level acquired (practical capacity, AQ) and the value-added standard quantity of activity that should be used (SQ). Assuming that inspection is a non-
value-added activity, SQ = 0 is the value-added standard. The volume variance in this framework has a useful economic interpretation: it is the non-value-added cost of the inspection activity. It measures the amount of improvement that is possible through analysis and management of activities ($120,000, in this example). However, since the supply of the activity in question (inspections) must be acquired in blocks (one inspector at a time), it is also important to measure the current demand for the activity (actual usage).
When supply exceeds demand by a large enough quantity, management can take action to reduce the quantity of the activity provided. Thus, the unused capacity variance, the difference between activity availability (AQ) and activity usage (AU), is important information that should be provided to management. The goal is to reduce the demand for the activity until such time as the unused capacity variance equals the volume variance. Why? Because the volume variance is a non-value-added cost and the unused activity variance measures the progress made in reducing this non-value-added cost. The calculation of the unused capacity variance is also illustrated in Exhibit 12-9. Notice that the unused capacity is 20 batches valued at $40,000. Assume that this unused capacity exists because management has been engaged in a quality-improvement program that has reduced the need to inspect certain batches of products. This difference between the supply of the inspection resources and their usage should impact future spending plans (reduction of a non-value-added activity is labeled as favorable).
For example, we know that the supply of inspection resources is greater than its usage. Furthermore, because of the quality-improvement program, we can expect this difference to persist and even become greater (with the ultimate goal of reducing the cost of inspection activity to zero). Management now must be willing to exploit the unused capacity it has created. Essentially, activity availability can be reduced; thus, the spendingon inspection can be decreased. A manager can use several options to achieve thisoutcome. Since the inspection demand has been reduced by 20 batches, the company needs only two full-time inspectors. The extra inspector could be permanently reassigned to an activity where resources are in short supply. If reassignment is not feasible, the company should lay off the extra inspector.
This example illustrates an important feature of activity capacity management. Activity improvement can create unused capacity, but managers must be willing and able to make the tough decisions to reduce resource spending on the redundant resources to gain the potential profit increase. Profits can be increased by reducing resource spending or by transferring the resources to other activities that will generate more revenues.
When supply exceeds demand by a large enough quantity, management can take action to reduce the quantity of the activity provided. Thus, the unused capacity variance, the difference between activity availability (AQ) and activity usage (AU), is important information that should be provided to management. The goal is to reduce the demand for the activity until such time as the unused capacity variance equals the volume variance. Why? Because the volume variance is a non-value-added cost and the unused activity variance measures the progress made in reducing this non-value-added cost. The calculation of the unused capacity variance is also illustrated in Exhibit 12-9. Notice that the unused capacity is 20 batches valued at $40,000. Assume that this unused capacity exists because management has been engaged in a quality-improvement program that has reduced the need to inspect certain batches of products. This difference between the supply of the inspection resources and their usage should impact future spending plans (reduction of a non-value-added activity is labeled as favorable).
For example, we know that the supply of inspection resources is greater than its usage. Furthermore, because of the quality-improvement program, we can expect this difference to persist and even become greater (with the ultimate goal of reducing the cost of inspection activity to zero). Management now must be willing to exploit the unused capacity it has created. Essentially, activity availability can be reduced; thus, the spendingon inspection can be decreased. A manager can use several options to achieve thisoutcome. Since the inspection demand has been reduced by 20 batches, the company needs only two full-time inspectors. The extra inspector could be permanently reassigned to an activity where resources are in short supply. If reassignment is not feasible, the company should lay off the extra inspector.
This example illustrates an important feature of activity capacity management. Activity improvement can create unused capacity, but managers must be willing and able to make the tough decisions to reduce resource spending on the redundant resources to gain the potential profit increase. Profits can be increased by reducing resource spending or by transferring the resources to other activities that will generate more revenues.
.
0 comments:
Post a Comment