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Capacity Measurement, Analysis and Improvement
Transcript of Capacity Measurement, Analysis and Improvement
Supplemental Rated Method
Focuses on serving the needs of both internal and external reporting with the same set of numbers.
uses two overhead rate
Rate for the plant or department operating at its baseline capacity
Supplemental rate for charging idle capacity costs to current production.
The Capacity Utilization Bottleneck Efficiency System
Capacity Measurement, Analysis and Improvement
Definition of Capacity
Capacity Cost Measurement Models
Case Study of CAM-I Model
The Role of Management Accountants
Management accountants can design programs to analyze capacity, defining and reproting the costs and caused of idle and nonproductive capacity, thus, impoving capacity utilization
Capacity Cost Measurement & Reporting System
Management accountants should assist in developing capacity cost measurement and reporting system in order to provide important information for management.
Assist in Strategic Planning
By forecasting the capacity cost and limits, management accountants can assist in strategic planning regarding product life, market growth and market share.
Baseline capacity Measures
Actual capacity utilization
The maximum amount of work that a process or plant can complete during 24 hours, 7 days operation without any waste.
Waste-unplanned downtime, shutdown or maintenance
Productive capactiy=100% Total capacity
In general, practical capacity is the amount of work that a process can attain.
Take some waste, such as set-ups, maintenance or breakdowns into account.
The average utilized capacity of a machine, process or plant over a defined period of time (day/week/moth/ year)
Annual budgeted capacity
The planned utilization of a machine, process or plant for the coming year, often stated as earned hours, machine hours, units of output or percentage of normal capacity.
Annual capacity utilization
The capacity actually used for period production, often stated as earned hours, machine hours, units of output or percentage of budgeted or normal capacity.
Important impact on the calculated cost of capacity and on overall management policies and procedures.
It is best practice to define and utilize theoretical capacity for management reporting.
Planning, assessing and managing the deployment of a firm's value-creating potential to meet customer needs.
Firms build excess capacites in fixed cost resources
Theoretical Capacity: is the theoretical maximum output that is possible if the resource is utilized to its fullest possible extent.
Capcity that provides value to the customer.
Capacity neither in a productive state nor in one of the defined idle states.
Planned nonproductive capacity
If measure with time:
For machine: 24 hours a day for 365 days a year
For employee: 8 hours a day for 365 days
Capacity planned for use, but temporarily out of use.
Planned idle capacity
Maximum capacity:maximum output that is possible with the current technology and environment.
Capacity that is not planned for use currently.
Permanently idle capacity.
For employee: break time
For equipment: maintenance
Efficient capacity: the maximum expected capacity utilization that can be attained given the current uncertainties in demand and production/service technologies.
Bottleneck capacity: the efficient capacity that can be employed in the short-run. This is the capacity that would normally get utilized in the present environment, given the technology, uncertainty and adjustment costs. The difference between this and the efficient capacity provides a measure of the potential future growth that the management expects.
Budgeted capacity reflects the short-term plan and the difference between bottleneck and budgeted capacity reflects the management’s expectation of future growth potential.
Time Frame of Analysis
Capacity Utilization Model
Unused resources, or resources used in ways that do not increase the value delivered to the customer, are waste.
Identifying specific types of capacity waste.
Analysis of Capacity Utilization Model
Caused by a mismath between actual capacity and the capacity requrired to meet demand.
Excess capacity that should be eliminated or redeployed.
Results from choosing a baseline capacity measure other than theoretical capacity.
Caused by mix variation or unbalanced production
Accounting -based Waste
Foucses on the excess inventory, standards that include scrap or waste, and related measurement problems that affect behavior and decisions in organizations.
Management-based waste is driven by existing policies (e.g, five-day, two-shift operation versus a seven-day, 24-hour approach).
Focuses on waste as key capacity measure;
Separates causes of capacity waste by time frames and actionability;
Supports analysis and prioritization of key capacity issues;
Consists of systemic capacity measures.
Application of capacity utilization model
Helene Curtis,a cosmetics and beauty parlor products firm which was based in Chicago, Illinois, is one company using this model.
Defining Capacity Cost Management
Capacity cost management is a system or process-based approach that emphasizes the interdependence of resources, not their individual capability.
The market price represents an upper boundary on the amount of resources a company can use in providing goods and services to its customers.
Market price is based on a core set of value-adding activities and attributes of a product and service.
Essence of Capacity Cost Management
To profitably manage the value-generating capabilities, processed and capacities of an organization in ways that support the strategic direction of the business.
To minimize the unit
cost of production
within the VAC
To minimize waste by establishing apporpriate benchmarks.
Requirements of Effective Capacity
In the short run, optimizing
capital decisions and the
effective and flexible use of investments that have already been made;
requirements for future
Supporting effective matching of a firm's resources with current and future market opportunities;
Closing any gap between
and a firm's capabilities.
in the short, intermediate and long run;
Providing useful costing information on current process costs versus those proposed in current or future investment proposals (e.g., the opportunity cost of not investing in a new asset which could provide better capacity/cost results);
Supporting the establishment of capacity utilization measurements that identify the cost of capacity and its impact on business cycles and overall company performance;
Identifying the capacity required to meet strategic and operational objectives, and to estimate current available capacity;
Detailing the opportunity cost of unused capacity and suggesting ways to account for that cost;
Supporting change efforts,
information and analysis on
the potential resource and
cost implications of a
Creating a common language for, and understanding of, capacity cost management.
ranges from one task to an assembly line, focuses on individual units of outputs.
Plant or Sub-unit Level:
suggests several processes and several unique types of outputs.
many different plants or sub-units combine to create a complex orgaization that serves many markets with many different types of products and services.
returns to a product or product line focus, but shifts its attention to all of the activities and resources of all organizations used to bring a good to the customer.
Capacity Utilization Measures
in assessing capacity utilization
This model was developed for a capital-intensive environment.
Focus on capacity planning and identifying/implementing continuous improvement efforts in capacity utilization.
Cost of Capacity
Analysis of CUBES Model
logic of cycle time analysis
Capacity Variance Model
Integrates financial and nonfinancial data;
Builds from activity-based costs;
Uses Theory of Constraints, or constraint, logic;
Provides a dynamic analysis and least-cost solution.
Application of CUBES Model
CUBES model is more suitable for firms facing challenges similar to semiconductor industry, which has high capital investment with short product life cycles.
The Capacity Variance Model emphasizes the differences between potential throughput or production and actual results.
Excess capacity exists in aging, fermenting and bottling that cannot be utilized usless brewhouse capacity is expanded.
Efficiency-based cpacity waste is a loss against theoretical capacity.
The last grid details the opportunity, or potential production, of the balanced system.
Key features of the
Details actual performance against theoretical capacity;
Identifies causes of capacity losses;
Supports opportunity cost analysis;
Can be tracked against improvement goals.
Supports internal and external reporting;
Easy to implement in existing systems;
Focuses on profit impact of idleness;
Provides summary statement of the total cost of idleness in a period.
Supplemental rated method provides a low-cost means of identifying and assessing the impact of idle capacity costs on overall performance, and this method is suitable for small company with easily defined capacity costs and issues.
Capacity Variance Model is recommended
for companies that wish to add some level of capacity cost management reporting to existing management report packages.
ABC and Capacity Cost Measurement
Activity Availability= Activity Usage+Unused Capacity
"Activity-based cost systems estimate the cost of resources used in organizational processes to produce outputs."---R. Cooper and R. Kaplan(1992)
Analysis of ABC
The objective of the Theory of Constraints (TOC) Model is to support continuous improvement through an organization.
Key Principles underpin the TOC Model
throughput capacity is defined by the underlying constraints of a system, which may be physical (i.e., a bottleneck) or invisible (i.e., policy, measurement, training) in nature;
"the goal" is to increase throughput while simultaneously decreasing investment (inventory) and operating expense, subject to meeting the needs of employees and customers;
capacity of the organization is infinite. In order to enable an organization to move closer to its goal, TOC focuses on removing the root problems that preventt improvement; and
the cost of idle capacity is not an opportunity cost unless customer orders exist that are not being filled.
Fits into activity-based cost model;
Reports both the quantity and cost of idle capacity;
Supports analysis of alternative solutions to capacity issues;
Strong emphasis on resources.
Key Features of the TOC Capacity Model
emphasizes company profitability over keeping people/machines busy;
highlights key constraints inhibiting process performance;
useful in plants or processes using TOC in their management processes;
provides solid baseline for action; and
strong track record of effectiveness.
This method is implemented in many large, medium-sized and small companies in North America and Europe.
This model is useful in any company using or implementing ABC. Hewlett-Packard Corp. is an example of firm that use this model.
Emphasize on the
contribution made by
an order (its throughput
) and the relationship
of this contribution
to the order's impact
on the constraining
The objective is to
and, hence, profit by
actively and effectively
The TOC Model provides unique strengths for companies that are managed under systemic, or process flow, approaches;
TOC seeks to prevent the waste cuased when resources are activated without any real demand for the subsequent output;
It is recommended for companies using TOC approaches elsewhere in the organization, especially if existing information systems can support traditional, external and TOC-based management reporting.
Integrated TOC-ABC Model
Key Features of the Integrated TOC-ABC Model
Uses mathematical modeling to solve for optimal capacity utilization;
Effectively combines both operational and financial views of the capacity problem;
Can be easily added to existing ABC applications;
When at least one bottleneck operation exists, provides a superior solution to a pure TOC or pure ABC methodology; and
Uses marginal revenue as its decision basis.
Utilizing a mixed-together programming approach, this model gives the optimal production mix subject to the capacity of the individual activities comprising the firm's production structure.
Cost Containment Model
Analysis of Cost Containment Model
Key Features of the Cost Containment Model
Focuses on support/service costs;
Supports/integrates with activity-based costing;
Builds on value-added, market-based models; and
Supports analysis and cost containment across many settings.
This model is recommended for companies that are embarking on competitive bidding for internal services; that are conducting bechmarking studies that focus on costs per process/ activity as a key data point; and that seek to continuously improve the quality of service delivered while reducing or containing the total cost of providing this service level.
This model has been used by companies like Apple Computer and Stratus Computer.
CAM-I Capacity Model
It is designed to support the strategic decision process by helping managers understand and define the many states of capacity, measure these states, and then communicate them in a simple format.
The basic CAM-I model is captured in a simple formula:
rated capacity= idle capacity+nonproductive capacity+productive capacity
Capacity not currently scheduled for use. The CAM-I Model breaks idle capacity into three specific classes: not marketable (no market exists or management made a strategic decision to exit the market), off limits (capacity unavailable for use) and marketable (a market exists but capacity is idle).
Capacity not in productive state or not in
one of the defined idle states. Nonproductive
capacity includes setups, maintenance,
standby, scheduled downtime, unscheduled
downtime, rework and scrap. Variability is
the primary cause of nonproductive capacity.
Capacity that provides value to the customer.
Productive capacity is used to change a product
or provide a service. Productive capacity results
in the delivery of goood products or services. It
may also represent the use of capacity for process
or product development.
Key Features of the CAM-I Model
integrates capacity data across many dimensions;
ties to the financial reporting system;
details responsibility for capacity losses; and
uses time as a unifying measure.
The CAM-I Model uses a comprehensive
capacity analysis approach. It can be utilized
in simple settings, relying on a small,
focused relational database structure. At a
more elaborate level, it can allow a
company to obtain the maximum benefit
from its data warehouse/ database
capabilities to provide an integrated,
flexible reporting package to be used
acorss an organization.
The CAM-I Capacity Model can be used in the annual planning process
and during interim quarterly update processes.
Management can use this model to assess current capacity status,
identify trends and plan changes in capacity.
Manufacturing can use the model to communicate and sell new business initaitives requiring
investment and operating chansges. It can also be used to access the cost, causes and
responsibility for capacity performance levels.
The CAM-I Capacity Model is built from activities at the operational level that can
be reported using several different formats.
Robert Kee developed a
new capacity model that
integrates the basic concepts
of TOC and ABC models to generate a mathematical,
least-cost solution to the
capacity utilization issue.
Utilizing a mixed-integer programming approach,
this model gives the
optimal production mix
subject to the capacity of
the individual activities comprising the firm's production structure.
In Integrated TOC-ABC Model, unit-level costs and resources are treated as continuous variables, while batch- and product-related costs are represented as discrete variables.
The solution resulting from the mathematical combination of ABC and TOC captures the best of both worlds in terms of assumptions and treatment of the firm's economic realities.
The opportunity cost of the resources is used to determine an optimal product mix, one that allows a company to select products with the highest contribution margin per unit and highest profit per unit for a bottleneck activity.
The opportunity cost from using the resources of the bottleneck activity is
reflected in the relative profitability computed for each product.
Objective of the Cost and Containment Model
The objective of the Cost and Containment Model is to analyze and
control future spending by isolating the non-value-adding activties
from those that are value-adding.
Resource Effectiveness Models
The primary concerns of the capacity cost measurement model are support of planning and analysis of current and future capacty investment.
Four Key measures that tracked by this model 摩德利
The results of this time-based analysis are easily translated into dollars through a process costing model defined on time consumed.
Resource Effectiveness = Standard Runtime / Resource Available Time
Asset Utilization = Standard Runtime / Plant Available Time
Operaing Efficiency = Standard Runtime / Production Available Time
Runtime Efficiency = Standard Runtime / Runtime
Gantt Idleness Charts
Henry Gantt developed one of the earliest tools for capacity cost measurement.
The objective of his idleness chart was to identify and eliminate avoidable idle time at the machine or process level
Focus on operations and translates into financial terms using standard cost estimates
Reported by department or machine class
Focuse on physical capacity utilization
Details the expense of idleness due to various common causes, such as lack of labor, reparis and poor planning.
Classifies the expense of idleness into avoidable and unavoidable components.
Efficiently highlight key capacity issues
Summarize performance in operational and financial terms
Detail costs and causes of idleness
Easy to implement and use
Total Planned Cost - Next 3 to 5 years
1. Driver chosen
2. Cost behavior determined
3. Average practical Capacity determined in units of time
Normalized Cost Estimate
Including idle capacity costs
Comparison of capaity cost measurement
Gantt’s focus was on detailing the primary causes for idle time on existing machines as well as the cost of this idleness. The major causes of idleness that he identified included Lack of orders, lack of labor, lack of raw material, lack of “worked” material, repairs, or poor planning
Capacity Utilization: Using the CAM-I Capacity Model in a Multi-Hierarchical Manufacturing Environment
Michael Ostrenga considers a multi-hierarchical manufacturing environment and proposes that the cost of used and idle capacities should be determined at the machine, shift and plant levels.
It separates fixed capacity costs into machine, shift, and plant-related costs in order to determine the unit fixed cost at each hierarchical level.
Sara's Table Restaurant: Application of CAM-I Model
Serve 150 dinners /evening;
An average of 105 dinners are served daily;
Open for dinner only, 6 days a week;
Service hours: 5pm-9pm;
Restaurant staffed hours: 4pm-11pm.
Information about Sara's Table restaurant
What suggestions do you have to improve the
physical or personnel capacity utilization of Sara's Table?
Theory of Constraints Capacity Model
Unchangeable: Theoretical capacity is constant.
Changeable: Capacity cost management focuses on improving the utilization of existing resources and processes
Changebale: A company can act to change how the process operates, which can
the theoretical capcity of the process. Also, a company can change the type and amount of resources it uses.
Unchangeable: However, the physical structure of the process
cannot be changed
Changeable: The entire process can be restructured. The theoretical capacity can be entirely changed. All the resources used to provide capacity can be changed.
Part I Introduction
Part II Common Language for Capacity Cost Measurement
Part III Models for Measuring the Cost of Capacity
Normalized Costing Approach
Part IV Case Study
Standard Runtime = Effective Runtime
Runtime = Standard Runtime + Runtime Losses
Production Available Time = Runtime + Production Downtime
Plant Available Time = Production Available Time + Plant Decision Downtime
Total Available Time = Plant Available Time + Policy Downtime
Normalized Costing is a capacity cost measurement model that uses average performance over time, adjusted for abnormal events in its calculation.
Abnormal expenses are eliminated from operational cost pools.
The capacity is determined, using practical capacity baselines set over a three-to five-year period.
Normalized cost is then determined by combining cost and capacity information to create a cost estimate.
Idleness costs are summarized in a seprate account, which becomes management's responsibility to eliminate.
Warm-up Question: What percentage of capacity do you think the manufacturers are using averagely?
Why companies are developing capacity management systems and tracking the cost of capacity?
Identify improvement opportunities
In the long run, recognition of the amount of structural idle capacity allows management to make a strategic investment and prevent an unneeded acquisition of additional resource capacity,
CAM-I separates used capacity into productive and nonproductive capacity and separate idle capacity into idle off-limits, idle marketable, and idle nonmarketable capacities.
It shows how acquired capacity was used or why a part of acquired capacity was kept idle.
Merge two literature to create a capacity measurement system that determines the cost of productive, idle, or nonproductive capacities at the machine, shift, and plant levels.
General Classification of Capacity:4Ps
What capacities the 4Ps represent for?
Purchase, or supply capacity
Can you give some examples of idle capacity in your life or work? What reasons cause the idle capacity?
In your opinion, is nonproductive capacity necessary? Why or why not?
Laws or regulations
Capacity is considered non-marketable
management does not exploit
If a company seeks to change its capacity profile, and you are hired as a consultant. What strategic (long-run) suggestions would you give to your client?
Time Frame of Analysis
A company could
Sell excess capacity
Lease plant and personnel
Design and build a new product or set of product/service
Pursue strategic alliances to increase the scope and availability of capacity
Engage in joint ventures to expand into new markets
E.g. Build a new plant
Robin Cooper and Robert Kaplan
Revived the capacity management issue first raised in the 1920s, when it was believed that the cost of idle capcity should not be included in the cost of a product or service but had to be written of to the income statement.
Gantt’s work in early 1900s
Church-Supplemental rate method
Church felt that Gantt's models did not reflect organizational realities. Instead, he focused on separating the costs of good production from idle capacity costs for ongoing reporting but then adding idleness costs back into product costs at the end of the reporting cycle using a “supplemental rate”
Blackstone’s 1989 monograph on capacity management
= Time available * (Time worked/time available) * (Standard hours produced/time worked)
= T * E * U
• Machine utilization
= (Hours available – hours down like setup and run time) / Hours available * 100
• Theoretical maximum utilization = 1
Chrch's second model
By 1931, Church began to question the use of the supplemental rate method. His second model focused on applying all costs at "the point of the tool". He argued that manager should keep track of how and why capacity was used and wasted.
The potential for creating value that an organization buys and uses to support its activities and outputs
The amount and type of work that a resource can support. It is the storability, flexibility and useful life of a resource
Cost of preparedness
The initial and continuing costs of readying resources for activity or use
The total economic value of all resources consumed in performing an activity over a predetermined period of time
A Framework for Unused Capacity: Theory and Empirical Analysis
• Discussion Questions: What resources does a computer manufacturing company have?
Can you come up with some examples of value-adding activities?
Theoretical capacity is derived from those physical assets, tools and resources that can sustain round-the-clock operation.
Reflecting actual performance and its effectiveness, capacity utilization measures are the raw data for constructing management reports and the basis for future planning and deployment of a firm's total capacity.
Organizations should assess the impact of supporting a capacity cost measurement system.
What information is required continuously rather than on an ad hoc basis.
Why the company would force the accounting system to continually collect data if spot checks would suffice.
This analysis alone can save resources, thereby increasing a firm's capacity to meet customers' requirements.
Full CAM-I Capacity Model
Rocketdyne Adaptation of CAM-I Model and Definitions
What is this issue
What benefits do
bring to the
What can we learn
Actual Capacity utilization shows the extent of under utilizion below the budget that may be due to inefficiencies. It may exceed the budgeted capacity but cannot exceed the maximum capacity.
If a company has the ability to run three manufacturing shifts per day and is only operating two shifts per day, then what is its capacity utilization rate?
Capacity utilization measures the extent to which a business is using its production potential.
Capacity utilization can be defined as - the percentage of total capacity that is actually being achieved in a given period.
Capacity utilization is calculated using this formula:
Capacity utilization is an important concept because:
- It is often used as a measure of productive
-Average production costs tend to fall as output rises
– so higher capacity utilization can reduce unit costs, making a business more competitive
-So firms usually aim to produce as close to full
capacity (100% utilization) as possible