CAPACITY DECISION

CAPACITY DECISION

Capacity Decision is a financial assessment and a clinical determination about a specific decision that can be implemented to yield good result. Capacity decision abounds in the business world, and balancing various capacities reflects how a company approaches business.

The question managers must answer for the capacity decision area is the same as the question for inventory: How much? Determining the actions capacity to produce goods and services involves both long-term and short-term decision .Long term capacity decisions involve facilities and major equipment investments. Capacity decision also involves short-term situations. In a grocery store, the number of customers that need to pay for their groceries at any point during the day will vary significantly. To provide good customer service, managers must make sure that sufficient cash registers and employees are on hand to check meet check-out demand.

TYPES OF CAPACITY DECISION
PRODUCTION CAPACITY: This deals with output and how a manufacturer balances raw materials, machinery, labour and storage to match demand for its products.

CAPACITY PLANNING: This is the process of determining the production capacity needed by an organization to meet changing demands for its products. Capacity decision affects the production lead time, customer responsiveness, operating ability to complete.

1 MAKE OR BUY DECISION: This is the act making a strategic choice between producing an item internally (in-house) or buying externally (from an outside supplier). The side of the decision also referred to as out sourcing. Make-or-buy decision usually arise when a firm significantly modified a product or part is having trouble with current suppliers, or has diminishing capacity or changing demand.

FACTORS THAT FAVOUR MAKING A PART IN-HOUSE INTERNALLY
1. Cost consideration (less expensive to make the part)
2. Desire to integrate plant operations
3. Need to exert direct control over production and/or quality
4. Better quality control
5. No competent suppliers.

FACTORS THAT FAVOUR FORMS TO BUY A PART EXTERNALLY
1. Lack of expertise
2. Small volume requirements
3. Desire to maintain a multiple source policy
4. Procurement and inventory consideration
5. Items not essential to the firm strategy.

The most important factors to consider in a make or buy decision are cost and the availability of production capacity. Element of The “Make “Analysis Include:

1. Incremental inventory – carrying costs
2. Direct labour cost
3. Incremental managerial cost
Cost considerations for the buy analysis include:
1. Purchase price of the part
2. Transportation cost
3. Receiving inspection costs

2. ACCEPT OR REJECT AN ORDER: a special order is a unique, one time order made by a customer that a variation in the manufacture of your regular products. As a manager your accounting staff should analyze the proposal and justify whether to accept or reject the special order. This will be based on sales revenue, cost of production and the long run. Implication of reducing prices accommodate special orders for the production line, you have to either leverage idle capacity or drop a process segment if you face resource constraints but have to meet the special request.

If incremental revenues are less than incremental cost, reject the special order unless qualitative characteristics overwhelmingly impact the decision.
If incremental revenues are greater than incremental cost, accept the special order unless qualitative characteristics, overwhelming import the decision.

If increments are equal to increment cost, focus primarily on qualitative characteristics to evaluate the decision.

3. CLOSING DOWN A SEGMENT OF A DIVISION: a segment is a component of a business that is or will generate revenues and cost related to operations. Financial information should be available for a segment activities and performance and must also be periodically reviewed by the company, management before a division can be made.

4. RELEVANT COST: Is a cost that only relates to a specific management decision, and which will change in the future as a result of that decision. The relevant cost concept is extremely useful for eliminating extraneous information from a particular decision making process. Relevant costs can be seen when it is determining whether to sell or keep a business unit, make or buy an item, or accept a special offer.

5. INCREMENTAL OR DIFFERENTIAL COST: I the increase in total costs resulting from an increase in production or other activity. For instance, if a company’s total costs increase from #320,000 to 360,000 as the result of increasing its machine hours from 8,000 to 10,000 the incremental cost of the 2,000 machine hours is 40,000.

6. OPPORTUNITY COST: This is the cost of an alternative that must be forgone in order to persue a certain action.

7. IRRELEVANT COST: Is an irrelevant cost because is a managerial accounting term that represents a cost, either positive or negative, that does not relate to a situation requiring management decision. Eg sunk and fixed overhead costs. It is also the cost incurred by a company which is unaffected by managements decision.

8. COMMITEES COST: Is a working sub-committee under the general IBC membership that assists cost engineers by providing metrics and tools that offer an unbiased snapshot of industry cost and schedule estimates and trends.

9. DISCRIMINATORY COST: This is a strategy that charges customers different process for the same product or services.