Professional Documents
Culture Documents
• Flexible resources
• Resources acquires as needed
• The cost of the resources is only incurred when the
resource is used
• Committed resources
• Resources acquired before they are actually used
• The cost of the resource is incurred whether the
resource is used or not
Capacity and costing example
• Suppose you own a company that produces three different products.
• The company has TWO machines that are used to produce all three
products. The total cost of the machines is $12,000 per month. The
machines can operate 30 days a month for 8 hours a day. However,
the machines are typically running about 90% of the time.
• Production requirements for each product:
MH/unit
Product 1 2
Product 2 3
Product 3 1
1. Determine the machine cost per unit for each product for
each month using the expected demand to allocate cost.
Month 1
Allocation rate per MH: $12,000 ÷ 305 machine hours = $39.34/MH
Month 2
Allocation rate per MH: $12,000 ÷ 275 machine hours = $43.64/MH
What is happening?
Why are the unit costs increasing as demand decreases (or stays
the same)?
What will most likely happen next?
Capacity Definitions
• Capacity
• The volume of activity associated with committed resources
2. Determine the machine cost per unit for each product for
each month using the practical capacity to allocate cost.
Capacity Costs
Month 1
Month 2
Capacity Costs
Month 1
Month 2
Month 1 Month 2
Capacity Costs
• How should the unused capacity costs be
addressed when making product decisions?
• It should be separately identified
• It should be the responsibility of those who demanded
the capacity in the first place