OPERATING DECISIONS 127
Assuming that each member of staff can process 2,000 transactions per annum,
the cost of resources supplied is £300,000 (10×£30,000) and the capacity number
of transactions is 20,000 (10× 2 ,000). The standard cost per transaction would be
£15 (£300,000/20,000 transactions).
If in fact 18,000 transactions were carried out in the year, the cost of resources
used would be £270,000 (18,000 @ £15) and the cost of unused capacity would be
£30,000 (2,000 @ £15, or £300,000 resources supplied−£270,000 resources used).
If the cost of resources used is equated with the cost of resources supplied,
the actual transaction cost becomes £16.67 (£300,000/18,000 transactions) and
the cost of unused capacity is not identified. This is a weakness of traditional
accounting systems.
Although there can be no carry forward of an ‘inventory’ of unused capacity
in a service delivery function, management information is more meaningful if
the standard cost is maintained at £15 and the cost of spare capacity is identified
separately. Management action can then be taken to reduce the cost of spare
capacity to zero, either by increasing the volume of business or reducing the
capacity (i.e. the number of staff).
Capacity utilization and product mix.........................
Where demand exceeds the capacity of the business to produce goods or deliver
services as a result of scarce resources (whether that is space, equipment, materials
or staff), the scarce resource is thelimiting factor. A business will want to
maximize its profitability by selecting the optimum product/service mix. The
product/service mixis the mix of products or services sold by the business, each
of which may have different selling prices and costs. It is therefore necessary,
where demand exceeds capacity, to rank the products/services with the highest
contributions, per unit of the limiting factor (i.e. the scarce resource).
For example, Beaufort Accessories makes three parts (F, G and H) for a motor
vehicle, each with different selling prices and variable costs and requiring a
different number of machining hours. These are shown in Table 9.1. However,
Beaufort has an overall capacity limitation of 10,000 machine hours.
Table 9.1 Beaufort accessories cost information
Part F Part G Part H
Selling price per unit £150 £200 £225
Variable material cost per unit £50 £80 £40
Variable labour cost per unit £50 £60 £125
Contribution per unit £50 £60 £60
Machine hours per unit 2 4 5
Estimated sales demand (units) 2,000 2,000 2,000
Required machine hours based
on estimated demand4,000 8,000 10,000