Analyzing change on capacity and decision making process
Introduction:
The SC is focus on client’s needs (Chopra & Meindl, 2007) meaning that internal operations including capacity levels © are adapted to clients lead time (L). Giving L and knowing capacity companies can calculate production (P). The P level should be sufficient for customers demand (D). Predictable D determines P at L giving as a result of©.
Additionally cost of production can be fixed or variable. Linear cost increases when production increases, exponential cost increases more than production increase and inverse proportional cost decrease when production increase. The total cost can increase or decrease depending on combination between types of cost and production volumes (Buyukkaramikli, Bertrand & Ooijen, 2013).
The optimal capacity level is the one that a less cost produces the quantities needs by customers at the right lead time (Chopra & Meindl, 2007).
For accounting purposes is a regular practice to capitalize overproducing capacity. Companies invested in high capacity levels and the total cost were capitalized and depreciated in a certain period of time following accounting rules such as strait line depreciation (Yahya-Zadeh, 2011). However, becoming price competitive in the market place, decisions on capacity investments should consider the additional cost for capacity resource that is not use or unused capacity for optimizing capacity investments (Slack & Lewis, 2011).
Changing capacity:
The capacity decision represents a significant investment for companies and it is part of the strategy in the SC, if too big, manufacturers generate surplus reducing price, if too small, shortage, loosing sales opportunities (Slack & Lewis, 2011). The conn...
... middle of paper ...
...valuation is a complex activity because the data decision for determining capacity is not always available. Companies may use informal approach, math calculations or linear models for determining capacity levels (Buyukkaramikli, Bertrand, Ooijen, 2013; Yahya-Zadeh, 2011).
Reference
Works Cited
Buyukkaramikli, N., Bertrand, J. & Ooijen, H. (2013) 'Periodic capacity management under a lead-time performance constraint', OR Spectrum, 35 (1), pp.221-49.
Chopra, S. & Meindl, P. (2007) Supply chain management : strategy, planning, and operation. 3erd ed. Upper Saddle River, NJ : Pearson/Prentice Hall.
Slack, N. & Lewis, M. (2011) Operations strategy. 3erd ed. Harlow : Financial Times Prentice Hall.
Yahya-Zadeh, M. (2011) 'A New Framework for Capacity Costing and Inventory Variance Analysis', Journal of Applied Management Accounting Research, 9 (2), pp.61-81.
Robinson, E. P., & Sahin, F. (2001). Economic production lot sizing with periodic costs and overtime. Decision Sciences, 32(3), 423-452. Retrieved from http://search.proquest.com/docview/198075992?accountid=32521
Activity-based costing (ABC) is a costing method that is usually used as a supplement to a company’s usual costing system, and is therefore used for internal decision-making. It is designed to inform managers of costing information for decisions (strategic and others) that potentially affect capacity and consequently “fixed” as well as variable costs. In addition, ABC can also be used to pinpoint activities that would benefit from process improvements.
[5] Colin Drury, Management and Costing Accounting, (7th edition), Chapter 17, Standard costing and variance analysis, p. 425-436
Any company is unable to manufacture a 100%. Therefore, people should really focus on the constraints, in a way that it will prevent a failure that will damage the entire system. Bottlenecks are the key in every plant, because it will determine the activity that will create a profit and maximize the business output.
the quantity demanded. The example he gives is if people have to put more time
In the case of making a TCO model, also opportunity costs and present value are taken into account. Taking present value into account means; making a difference between future and past cash outlays. This way the time value of money can be considered when comparing the different alternatives. Opportunity costs finally can be described as:
The average cost maintains the full cost of the objective divided by the number of units of provided service while the marginal cost refer to the additional cost incurred as a result of providing one more service unit (Finkler et al., 2013). The fixed cost refrains from changing based on changes in volume of service units while variable cost, on the opposite end, varies in cost based on changes in volume of service units (Finkler et al.,
Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do.
Schonberger, R.J. and E.M. Knod Jr. Operations Management: Continuous Improvement. Richard D. Irwin, 1994, p. 44. 16. Selto, F.H. and D.W. Jasinski. "
The company is now facing the demand of more products without the capability of producing, and the threat of new entrants into the market is becoming significant. Mr. James M. Elliot, the CEO and Chairman of the Board at Bytes Products, Inc, noticed that the company was facing numerous problems. The existing three plants run on 3 shifts schedule of 24hours a day and 7 days a week using up all possible production. It has now become evident to Mr. Elliot that if the three existing plans were to be running at maximum capacity at all times, the demand of production would still not be met. If the company’s overall supply is unable to meet the demands of its customers it would cause a negative impact on the company by not being able to maintain its current market share.
Obviously, this case aims to evaluate Joanna’s analysis. Throughout the analysis, we will estimate the cost of debt, cost of equity, and cost of capital through different financial analysis models.
...st manufacturing company, actual time of occurrence and vigorous and purposeful customer demand analysis is required by most, if not all manufacturing companies to efficiently and automatically act in response of customers demand.
Activity-based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Activity-based costing is mostly used for internal decision making and managing activities while traditional costing method is used to provide data for external financial reports. Most organization uses activity-based costing as an addition system for using traditional absorption costing as sometimes the traditional cost system misleads the product’s profitability. In a company, there are many products on sale, if one product is sold at a high price with low product margin and a product with high product margin at a low price, it may result in a loss. In addition, due to the reason that cost drivers and enterprises business may change, activity-based costing analysis also needs to be revised periodically. This amendment should be prompted to change pricing, product, customer focus and market share strategy to improve corporate profitability.
Slack, N., Johnston, R. and Brandon-Jones, A. (2011).Essentials of operations management. 1st ed. Harlow, England: Financial Times Prentice Hall.
According to Slack et. al. (2001) the best mechanism for running a business is to match level of demand (goods, services that customers need) with supply of capacity (recourses, labor force that the business inputs in the production process). They also define capacity as “the maximum level of value –added activity over a period of time”. Thus three main factors come into force here – the capacity of resources and labor force, the process operation which itself leads to satisfying customers through matching demand. It is very important to plan and coordinate all 3 factors very effectively because a difference in capacity and performance easily affects: costs, revenues, working capital, flexibility, quality of goods, speed of response and others.