Accounting Q&A · Cost and Management Accounting · Topic 28
Try each question before revealing the answer.
25 short-answer questions. Try each question before revealing its answer.
Worked example
A plant supplies 1,000 practical machine hours at a monthly cost of 50,000. It uses 800 hours. At 50 per hour, 40,000 is assigned to used capacity and 10,000 is reported as unused capacity in this internal model.
Core concepts
1. What is capacity?
The amount of work a resource or system can perform over a period.
2. What is theoretical capacity?
Maximum output under ideal uninterrupted conditions.
3. What is practical capacity?
Achievable capacity after allowing for normal downtime and operating limits.
4. What is actual output?
The units or service delivered during the period.
5. How do you measure capacity utilisation?
Divide capacity used by available capacity, using the same units and period.
6. What is idle capacity?
Available resources that were not used during the period.
7. What is peak demand?
The highest activity expected over a defined interval.
8. Why choose a useful capacity unit?
Machine hours, staff hours and units capture different limitations.
9. What is a capacity bottleneck?
A resource whose capacity limits system output under current demand and conditions.
10. Why consider setup time?
Setups use available capacity and can change the feasible production mix.
Worked applications
11. A machine supplies 600 hours and uses 450. What is utilisation?
75%.
12. How much capacity is unused in that case?
150 hours.
13. If the resource costs 24,000, what is cost per practical hour?
40 if practical capacity is 600 hours.
14. At that rate, what cost is associated with the unused 150 hours?
6,000 under the stated internal allocation model.
15. Does reducing unused hours automatically save cash?
Spending changes only if resources are reduced, redeployed productively or otherwise avoided.
16. What is a capacity cushion?
Extra capacity held above expected demand to handle uncertainty or variability.
17. Why can very high utilisation create queues?
Little spare capacity remains to absorb variation, downtime or urgent work.
18. What is outsourcing in a capacity decision?
Using an external supplier to deliver some work instead of using or adding internal capacity.
19. What is an opportunity cost of using scarce capacity?
Contribution forgone from the best displaced work.
Review and exam practice
20. A job contributes 300 and uses six scarce hours. What is contribution per scarce hour?
50.
21. Another job contributes 220 and uses four scarce hours. Which ranks first under one constraint?
The second job at 55 per scarce hour, subject to demand and other limits.
22. When can overtime help?
When extra contribution exceeds incremental overtime and associated costs, and quality and safety remain acceptable.
23. Why model a long-term expansion separately?
New capacity can create fixed commitments, lead times and demand risk.
24. What is a common reporting error?
Using one denominator for cost rates and a different, undocumented denominator for utilisation.
25. What should a capacity recommendation show?
Demand, practical capacity, constraints, relevant costs and the effect of uncertainty.