ADMS 3510 Lecture Notes - Capacity Management, Fixed Cost, Total Absorption Costing
23 Dec 2012
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Capacity choice -> denominator level -> price and cost. Denominator levels: a complex decision w/ complex effects. Supply level constraints: theoretical capacity: no delays, practical capacity: w/ idle time. Demand level constraints: normal capacity: over specified time satisfying average customer, master capacity: satisfy customer demand for budget cycle for tax purposes. Note: dol increases for mechanization and dol decreases for labour intensive. Product price ( full absorption: capacity demand ( normal > = master budget) If actual production is less than theoretical capacity because there is no demand or production is interrupted, the production-volume variance will be high and indicated opportunity cost of idle productive capacity. This is a non-value added cost for which a customer will not pay. Practical capacity reduces theoretical capacity for unavoidable operating interruptions such as scheduled maintenance time, shutdowns for holidays, safety inspections and so on. This type of scheduled idle capacity is often called off-limits idle capacity.
