Question

a) Define the ‘cost of capacity’. (1 mark) c) What is required for effective management of capacity and why? d) Define theoretical and practical capacity, as used in calculating volume variances. e) Identify and explain three common flaws in capacity measurements (possibly more than one). g) Identify and explain two advantages of measuring the cost of capacity .

Answer 1

Cost of capacity is the cost which is borne or invested by any company to expand its existing facility and quality of services which directly impacts on business bottom-line, thereby improving the chances of future business gains.

Capacity management starts with identifying the areas where money should be invested for further improvement to ensure smooth business operations. There could be multiple ways to manage the capacity such as conducting the SWOT analysis of all the business operations areas and identifying the business opportunities from that. Sometimes existing capacity can be managed in such a way that organization can harness the maximum output from that. While sometimes further facility up gradation is required to maximize the output.

Theoretical capacity is the capacity of the unit which can be extracted, in idealistic scenario. Though theoretical capacity is very difficult to attain. While on the other hand practical capacity is the current capacity which can be estimated considering the current scenario, considering all the operations challenges and its assessment.

Some of the common flaws in capacity measurement could be as below-

1. Overestimating the resource capability- Sometimes we overestimate the resources capability, notwithstanding the practical & real time challenges.
2. Wrong forecasting of business- Sometime wrong forecasting of the business operations also lead to the wrong capacity measurements.
3. Too much of reliance on the software- While calculating the capacity measurements, sometimes we rely too much on business programming and software, thereby undermining te importance of ground situation. This sometimes causes great mismatch in what we presume and what eventually comes out as an outcome.