jiriyu
Nov 23, 2009, 12:38 AM
In manufacturing, capacity represents the work that could be performed if all the resources of the factory are used to their full potential. For example, running three shifts a day, a factory should be able to produce a given output per year. A management accountant could then compute unit cost using “practical capacity” or ”actual utilization” as a base. In a manufacturing setting, the argument in favor of using practical capacity as a
Denominator to compute unit costs is that it eliminates the effect of volume differences on
Cost computation, and that it suggests what a product should cost if capacity is fully utilized.
On the other hand, practical capacity can be arbitrary, masks the actual costs, and may be
Difficult for non-accountants to understand.
What is the relevance of capacity considerations in a medical practice? To benchmark against other practices, should FMMG compute the cost of each unit of service delivered on a capacity base or an actual volume base? When would capacity or actual volume bases be most appropriate in medical practices?
Denominator to compute unit costs is that it eliminates the effect of volume differences on
Cost computation, and that it suggests what a product should cost if capacity is fully utilized.
On the other hand, practical capacity can be arbitrary, masks the actual costs, and may be
Difficult for non-accountants to understand.
What is the relevance of capacity considerations in a medical practice? To benchmark against other practices, should FMMG compute the cost of each unit of service delivered on a capacity base or an actual volume base? When would capacity or actual volume bases be most appropriate in medical practices?