Can you measure the cost of an unutilised capacity?



THE INTRODUCTION:

The client in question is a joint venture public limited listed company that is the leading manufacturer of thermal products for automotive applications in India.



THE PROBLEM:

As a manufacturing concern, we want to know how much of the capacity is utilised for production and how much capacity is wasted or unutilised or kept idle. In a capacity-aware model, the allocation of costs follows the usage of capacity.

A company's measurement of available capacity and utilisation is an essential ingredient. Therefore, it becomes imperative to analyse capacity planning thoroughly, including the planning for quantity produced or the scale of output.


Therefore, the client needs to ensure whether the capacity is planned rationally or not. They want to inspect capacity management more holistically, not missing out on any material information that might impact their business. Some of these considerations are:

  • Proper demand forecasting

  • Identifying throughput bottlenecks

  • Appropriate material requirement planning (MRP)

  • Incorporating actual capacity

  • Accurate capacity measurement

  • Common framework for all manufacturing facilities in PAN India, including its unit of measurement (UOM)



THE SOLUTION:

To develop a capacity measurement model that addresses the management’s concerns and can be universally adopted for manufacturing facilities across the country. To this end, the following accurate cost capacity measurement model should be generated on a real-time basis:


​Summary Model

Industry Specific Model

Idle

  • Not Marketable

  • Off Limits

  • Marketable

Non - productive

  • ​Standby

  • Waste

  • Maintenance

  • Setups

Productive

  • Process Development

  • Product Development

  • Good Products




THE RESULTS:

After in-depth deliberations and continuous collaboration with the client for over three months, our team at Chandra Wadhwa & Co. developed a detailed-oriented capacity measurement model, which helped the client address the capacity management-related challenges.


The detailed model with an illustrative example can be accessed here. [1].


The model not only helped us to derive the capacity cost for the above-mentioned key metrics but also assisted in achieving excellent results in the following domains:

  • Increased resource utilisation

  • Leaner operations

  • More on-time delivery

  • Full visibility

  • Higher margins

  • Assurance on available capacity and capacity utilised numbers

  • More efficient capacity planning

  • Fact-based ‘cost of capacity’ allocations




FOOTNOTES:


1. Footnote 1_Capacity cost 🡕


 


CONTACT US

Reach us if you have any concerns regarding cost management accounting issues in your organization.


SANKALP WADHWA

Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)


Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: sankalp.wadhwa@cwcindia.in

Tel: +91-8800018190, +91-7503703599.

Website: www.cwcindia.in