Resources and Costs

• Flexible resources
• Resources acquires as needed
• The cost of the resources is only incurred when the
resource is used
• Committed resources
• Resources acquired before they are actually used
• The cost of the resource is incurred whether the
resource is used or not
Capacity and costing example
• Suppose you own a company that produces three different products.
• The company has TWO machines that are used to produce all three
products. The total cost of the machines is $12,000 per month. The
machines can operate 30 days a month for 8 hours a day. However,
the machines are typically running about 90% of the time.
• Production requirements for each product:
MH/unit
Product 1 2
Product 2 3
Product 3 1

• Expected demand (in units) for Months 1 and 2:

Month 1 Month 2
Product 1 40 40
Product 2 50 45
Product 3 75 60

1. Determine the machine cost per unit for each product for
each month using the expected demand to allocate cost.
 Month 1
Allocation rate per MH: $12,000 ÷ 305 machine hours = $39.34/MH

Month 2
Allocation rate per MH: $12,000 ÷ 275 machine hours = $43.64/MH

What is happening?
Why are the unit costs increasing as demand decreases (or stays
the same)?
What will most likely happen next?
 Capacity Definitions
• Capacity
• The volume of activity associated with committed resources

• Theoretical capacity – the total amount available

• Practical capacity – theoretical capacity less normal
downtime
• Utilized capacity – the amount of capacity used
 Capacity and costing example
1. What is theoretical capacity (per month)?
2 machines x 30 days/month x 8 hours/day = 480 hours/month

2. What is practical capacity (per month)?

480 hours/month x 90% = 432 hours/month
Capacity and costing example
• Suppose you own a company that produces three different products.
• The company has TWO machines that are used to produce all three
products. The total cost of the machines is $12,000 per month. The
machines can operate 30 days a month for 8 hours a day. However,
the machines are typically running about 90% of the time.
• Production requirements for each product:
MH/unit
Product 1 2
Product 2 3
Product 3 1

• Expected demand (in units) for Months 1 and 2:

Month 1 Month 2
Product 1 40 40
Product 2 50 45
Product 3 75 60

2. Determine the machine cost per unit for each product for
each month using the practical capacity to allocate cost.
 Capacity Costs
Month 1

Month 2
 Capacity Costs
Month 1

Month 2
Month 1 Month 2
Capacity Costs
• How should the unused capacity costs be
addressed when making product decisions?
• It should be separately identified
• It should be the responsibility of those who demanded
the capacity in the first place

• How can a company reduce the costs of unused

capacity?

• Is all unused capacity bad?

Anagene
• Describe the industry Anagene operates in.

• What is(are) their primary product(s) and what is

their manufacturing strategy?
Anagene
Cartridges:
• Budgeted overhead rate for 2001 (50,000 units)?
$1,299,581/50,000 = $26 (rounded)

• Total gross margin expected at 50,000 units?

50,000 x $97 = $4,850,000 (65%)

• Revised overhead rate for 2001 (26,000 units)?

$1,299,581/26,000 = $50 (rounded)

• Total gross margin expected at 26,000 units?

26,000 x $68 = $1,768,000 (45%)
Anagene
• What are the issues facing Anagene?
• Margins are decreasing based on their standard costs
• Analysts are questioning the long-term profitability of the
company.
• Fluctuations in margins from month to month
• Difficult for the board and the analysts to understand short-
term profitability.

• Can they devise a better way to calculate product

costs and gross margins for management decision
making purposes?