126 ACCOUNTING FOR MANAGERS
Slacket al.(1995) contrasted types of service provision with types of manu-
facturing and used a matrix of low volume/high variety and high volume/low
variety to compare professional service with customized or batch manufacturing,
mass service with continuous manufacture, and service shop with a batch-type
process. Slacket al.noted that this product – process matrix led to decisions about
the design of the operations function, while deviating from these broad groups
had implications for both flexibility and cost.
In describing operations, we will use the termproductionto refer to both
goods and services and usemanufacturingwhere raw materials are converted into
finished goods.
Accounting information has an important part to play in operational decisions.
Typical questions that may arise include:
žWhat is the cost of spare capacity?
žWhat product/service mix should be produced where there are capacity con-
straints?
žWhat are the costs that are relevant for operational decisions?
Accounting for the cost of spare capacity
Production resources (material, facilities and equipment, and people) allocated to
the process of supplying goods and services provide a capacity. The utilization
of that capacity is a crucial performance driver for businesses, as the investment
in capacity often involves substantial outlays of funds that need to be recovered
by utilizing that capacity fully in the production of products/services. Capacity
may also be a limitation for the production and distribution of goods and services
where market demand exceeds capacity.
A weakness of traditional accounting is that it equates the cost ofusingresources
with the cost ofsupplyingresources. Activity-based costing (which is described
further in Chapters 10 and 11) has as a central focus the identification and
elimination of unused capacity. According to Kaplan and Cooper (1998), there are
two ways in which unused capacity can be eliminated:
1 Reducing the supply of resources that perform an activity, i.e. spending reduc-
tions that reduce capacity.
2 Increasing the quantity of activities for the resources, i.e. revenue increases
through greater utilization of existing capacity.Activity-based costing identifies the difference between the cost of resources
supplied and the cost of resources used as the cost of the unused capacity:
cost of resources supplied−cost of resources used=cost of unused capacityAn example illustrates this.
Ten staff, each costing £30,000 per year, deliver banking services where the
cost driver (the cause of the activity) is the number of banking transactions.