Activity Capacity Management

Activity capacity is the number of times an activity can be performed. Activity drivers measure activity capacity, For example, consider inspecting finished goods as the activity. A sample from each batch is taken to determine the batch's overall quality. Suppose that the number of batches inspected measures activity output. Assume that $60$ batches are scheduled to be produced; thus, the required capacity is $60$ batches. Finally, assume that a single inspector can inspect $20$ batches per year. Thus, three inspectors must be hired to provide the necessary capacity. If each inspector is paid a salary of $$40,000,$ the budgeted cost of the activity capacity is $$120,000.$ The budgeted activity rate is $$2,000$ per batch $($$$120,\frac{000}{60}).$

Knowing what the active capacity should be and how much of the capacity was actually used reveals how much improvement is possible, the amount of nonproductive cost, and the opportunity for capacity reduction and cost savings. To determine the potential for improvement and the progress made in the objective of eliminating waste, two capacity variances are defined and calculated: the activity volume variance and the unused capacity variance. The activity volume variance is the difference between the actual activity level acquired $($practical capacity, $AQ)$ and the value$-$added standard quantity of activity that should be used $($SQ$),$ multiplied by the budgeted activity rate $($SP$)$:

Activity volume variance $=(AQ-SQ)SP$

The volume variance measures the non$-$value$-$added cost of the inspection activity and, accordingly is always labeled as an unfavorable variance. The unused capacity variance is defined as the difference between activity availability $($AQ$)$ and activity usage $($AU$),$ multiplied by the budgeted activity rate $($SP$)$:

Unused capacity variance $=(AU-AQ)SP$

The unused capacity variance measures the progress toward reducing the activity waste. The goal is to reduce the demand for the activity until such time as the unused capacity variance equals the volume variance. Why? Because the volume variance is a non$-$value$-$added cost and the unused activity variance measures the progress made in reducing this non$-$value$-$added cost. Thus, the unused capacity variance is fabeled as favorable.

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Apply the Concepts

Consider an analysis of capacity for the activity, inspecting finished goods. Activity output is measured by inspection hours. The following data pertain to the activity for the most recent year:

Activity supply: $10,000$ hours $($five inspectors @ $2,000$ hours per year$)$

Inspector cost $($salary$)$: $$50,000$ per year

Actual usage: $7,500$ inspection hours

Required:

Calculate the volume variance:

Volume variance: $x$

$2.$ The volume variance is a measure of $$

$3.$ Calculate the unused capacity variance:

Unused capacity variance: $x$

$4.$ Based on the unused capacity variance, activity spending can be reduced by $ $$

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