Question

9-29 Capacity management, denominator-level capacity concepts. Match each of the following numbered descriptions with one or more of the denominator-level capacity concepts by putting the appropriate letter(s) by each item: a. Theoretical capacity b. Practical capacity c. Normal capacity utilization d. Master-budget capacity utilization 1. Measures the denominator level in terms of what a plant can supply 2. Is based on producing at full efficiency all the time 3. Represents the expected level of capacity utilization for the next budget period 4. Measures the denominator level in terms of demand for the output of the plant 5. Takes into account seasonal, cyclical, and trend factors 6. Should be used for performance evaluation in the current year 7. Represents an ideal benchmark 8. Highlights the cost of capacity acquired but not used 9. Should be used for long-term pricing purposes 10. Hides the cost of capacity acquired but not used 11. If used as the denominator-level concept, would avoid the restatement of unit costs when expected demand levels change

Answer 1

1. Theoretical and Practical capacity: Measures the denominator level in terms of what a plant can supply

2. Theoretical capacity: Is based on producing at full efficiency all the time.

3. Master-budget capacity utilization: Represents the expected level of capacity utilization for the next budget period.

4. Normal and Master-budget capacity: Measures the denominator level in terms of demand for the output of the plant.

5. Normal capacity utilization: Takes into account seasonal, cyclical, and trend factors.

6. Master-budget capacity utilization: Should be used for performance evaluation in the current year.

7. Theoretical capacity: Represents an ideal benchmark.

8. Theoretical and Practical capacity: Highlights the cost of capacity acquired but not used.

9. Master-budget capacity utilization: Should be used for long-term pricing purposes.

10. Normal and Master-budget capacity: Hides the cost of capacity acquired but not used.

11. Theoretical and Practical capacity: If used as the denominator-level concept, would avoid the restatement of unit costs when expected demand levels change.

Step-by-step explanation:

Capacity can be defined as the maximum level of output that a particular organization can sustain to manufacture goods or provide a service to meet the demands of it's customers.

Under the capacity management, we have the denominator-level capacity concepts. The denominator-level capacity concept is used to describe the capacity level that is considered for analyzing a manufacturing process or business operations. They are classified as follows;

- Theoretical capacity: the denominator-level concept based on producing continuously at full efficiency.

- Normal capacity utilization: is based on the level of capacity utilization which satisfy the average customer demand periodically such as trend, cyclical and seasonal factors.

- Practical Capacity: is based on the level of capacity that involves unavoidable operating interruptions, such as scheduled equipment maintenance or repair time, holiday shutdowns etc.

- Master-budget capacity utilization: is based on the level of capacity expected for the current budget period, typically a year.