Question

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. Do you agree? If not, explain.

1) Yes
2) No

Answer 1

The difference between practical capacity and master-budget capacity utilization is not the best measure of management's ability to balance capacity costs, as it omits consideration of market trends, strategic decisions, and other important factors.

Step-by-step explanation:

No, the difference between practical capacity and master-budget capacity utilization is not necessarily the best measure of management's ability to balance the costs of having too much capacity and having too little capacity. Practical capacity refers to the maximum amount of work that can physically be done, given the organization's resources, without considering external factors and the variability of demand, while master-budget capacity utilization is based on the projected level of demand in the budget period.

Management's ability to balance these costs involves understanding and predicting market demand, making strategic decisions on capacity investments, and managing operational efficiency. A larger difference may indicate inefficiency or misalignment with market demand, and a smaller difference doesn't automatically signify optimal performance. Other factors such as market trends, competitive strategy, and technological advancements must be considered.

Additionally, management's ability to adjust to short-term changes and their long-term strategic planning for capacity should also be taken into account when evaluating performance, rather than solely relying on a comparison between capacity measures.