Idle Capacity and Management

BE Presentation
by
Bhawna Gosain(16) Dhiksha Purohit
Dhiman Ray(21) Chetanya Vali(18)
Kapil Dhar(33) Mayank Agarwal(43)
Kumar Sain Goyal(37) Mukesh Kumar(46)

For internal use only

1 © Nokia Siemens Networks Presentation / Author / Date
 Idle Capacity in Non-Production and Service
Industry
Market
Demand

People Used Capacity

Fixed Cost Services Services
in short run Unused Capacity
Infrastructure

Capacity
Planning Management Function

Mechanism to create Market Demands to subside the Unused Capacity

cost
- Discounts during off peak ( season/day of time)
- Various schemes – Advertisements
- Dynamic pricing ( hotel, airlines and now in telecom)

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 Idle Capacity in Production
Market Production
Demand Flexibility
Cost

Variable
cost in Labor
Used Capacity
short run Raw material Production
Function
Fixed Cost Idle Capacity
Machine
in short run

Capacity
Planning
Management Function

In which scenario Idle capacity help companies to compete in the Market
How Idle capacity help in creating market demand for its products
Idle capability can lead to non competitiveness of company
Various ways to calculate idle costs and look for process oriented cost
measures and checks

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 Various Mechanism of Cost
Calculations/Allocation
Traditional
• Only Manufacturing cost assigned to products
• Non manufacturing activities were treated as period cost and
were not added to the final product cost

Activity Based Costing (ABC) system

products are assigned all of the costs-manufacturing as
well as non-manufacturing-that they can reasonably be
supposed to have caused.

Thus the entire cost of the product is determined rather than

just its manufacturing cost.

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 How Costs are Treated Under Activity-Based
Costing

Activity
Activity Based
Based
Costing
Costing

Departmental
Departmental
Overhead
Overhead
i ty
Rates
Rates l ex
p
o m
Plantwide
Plantwide f C
l o
Overhead
Overhead v e
Rate
Rate Le
Overhead Allocation

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 Activity Based Costing (ABC)

ABC is designed to ABC is a

good supplement
provide managers to our traditional
with cost information cost system

for strategic and I agree!

other decisions that
potentially affect
capacity and
therefore “fixed”
costs.

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 Cost of Idle Capacity

Traditional
Traditional Cost
Cost Activity
Activity Based
Based
Accounting
Accounting Costing
Costing

The
The predetermined
predetermined Products
Products are
are charged
charged
overhead
overhead rate
rate is
is based
based for
for the
the costs
costs of
of capacity
capacity
on
on budgeted
budgeted activity.
activity. they
they use
use –– not
not for
for the
the
costs
costs of
of capacity
capacity they
they
don’t
don’t use.
use.
This
This results
results in
in applying
applying Idle
Idle capacity
capacity is
is charged
charged
overhead
overhead costs
costs of
of as
as aa period
period Cost
Cost thus
thus
unused,
unused, or
or idle,
idle, capacity.
capacity. not
not charged
charged toto products.
products.

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 Linear Programming - Idle Capacity

Step 1:Define linear profit Function. The Function maximised

the profit
Step 2: Define the Constraint representing the limited activity
capacities like b1 …b3 for individual activities x1,x2.. xn

Eliminate those products that consume

a high and over-proportional part of the
overhead departments’ capacities.

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 In Business | Traditional Costing Accounting

Labor

M/C
+ Overhead cost
Material

Direct Labor Cost

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 In Business | Activity Based Costing (ABC)
Changes the Focus

Other Activities
Labor
Product
Development
M/C
+ Product
Launch
10 %

Material
Marketing
Direct Labor Cost
Sales
System = 9%

The new information produced by the ABC study also helped Euclid in its relations with
customers. The detailed breakdown of the costs of design and engineering activities
helped customers to make trade-offs, with the result that they would often ask that
certain activities whose costs exceeded their benefits be skipped.

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 How to Calculate Cost of Idle Capacity by ABC ?

Z Mobile company makes two phone of two different model :

•Model A
•Model B

Step:1 Identify the main activities in the organization

1. Machine Maintenance 400

2. Quality Control 600

Total Overhead of the firm = 1,000

Step 2 Identify factors which determine cost (Cost drivers)

Model A Model B Total

Number of Machine Hour 6 4 10
Number of Inspections 3 7 10

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 Step 3 : Collect the cost of each activity (Cost Pools)

A+B
Overhead of Machine Maintenace 400
Number of Machine Hour 10
Rate per unit machine hour 40

A+B
Overhead of Quality control 600
Number of Inspections 10
Rate per unit Inspection 60

Step 4: Charge support overheads to product on the basis of their usage of the
activity

Model A Model B
Number of Machine Hours 6 4
Rate per unit Machine 40 40
Overhead per product 240 160

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 Model A Model B
Number of Inspections 3 7
Overhead of Quality control 60 60
Overhead per product 180 420

Final Result

Overhead Model A Model B

Linked to Maintenace activity 240 160
Linked to Quality control 180 420
Total Overhead Rs 420 580

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 Management Functions – Idle Capacity

- Product Portfolio Management

- Handing Seasonal nature of Products and rising cost in fixed Capacity
- Eliminate products consuming high and overhead costs
- Managing Demand Flexibility
- Product Costing – Overhead optimization
- Informed Decision making
- Optimizing the overheads

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For IIFT MBA 2010 - 2013 Presentation / Author / Date