Capacity Considerations Flashcards
Theoretical Capacity
production capacity at full efficiency all the time
Practical Capacity
production capacity that allows for normal downtime, such as maintenance and holidays
Normal Capacity Utilization
“usual” demand over a period time long enough smooth out random events and seasonality
Master Budget Capacity Utilization
how much managers predict during the next budget cycle
How to avoid “cost allocation death spiral”
avoid budgeted or normal capacity and use supply-based measures of capacity (practical capacity)
Which capacity is the best way to measure management performance?
master budget capacity utilization because the firm’s prediction about current period activity can be used as a benchmark
Which capacity is the best way to measure cost of unused capacity?
practical or theoretical capacity
Which capacity is the best way to measure pricing?
practical capacity
