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1 Nokia Siemens Networks Presentation / Author / Date
Idle Capacity and Management
BE Presentation
by
Bhawna Gosain(16) Dhiksha Purohit
Dhiman Ray(21) Chetanya Vali(18)Kapil Dhar(33) Mayank Agarwal(43)
Kumar Sain Goyal(37) Mukesh Kumar(46)
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Idle Capacity in Non-Production and ServiceIndustry
Services
People
Infrastructure
Fixed Cost
in short run
Market
Demand
Capacity
Planning
Unused Capacity
Used Capacity
Services
Management Function
Mechanism to create Market Demands to subside the Unused Capacitycost
- Discounts during off peak ( season/day of time)
- Various schemes Advertisements
- Dynamic pricing ( hotel, airlines and now in telecom)
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Idle Capacity in Production
Production
Function
Labor
Raw material
Machine
Variable
cost in
short run
Fixed Cost
in short run
Market
Demand
Capacity
Planning
Used Capacity
FlexibilityProduction
Cost
Management Function
Idle Capacity
In which scenario Idle capacity help companies to compete in the MarketHow Idle capacity help in creating market demand for its products
Idle capability can lead to non competitiveness of company
Various ways to calculate idle costs and look for process oriented costmeasures and checks
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Various Mechanism of CostCalculations/Allocation
Traditional Only Manufacturing cost assigned to products
Non manufacturing activities were treated as period cost andwere not added to the final product cost
Activity Based Costing (ABC) system
products are assigned all of the costs-manufacturing aswell as non-manufacturing-that they can reasonably besupposed to have caused.
Thus the entire cost of the product is determined rather thanjust its manufacturing cost.
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How Costs are Treated Under Activity-BasedCosting
Overhead Allocation
PlantwidePlantwide
OverheadOverhead
RateRate
DepartmentalDepartmental
OverheadOverhead
RatesRates
Activity BasedActivity Based
CostingCosting
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Activity Based Costing (ABC)
ABC is designed toABC is designed toprovide managersprovide managers
with cost informationwith cost information
for strategic and otherfor strategic and otherdecisions thatdecisions that
potentially affectpotentially affectcapacity andcapacity and
therefore fixedtherefore fixedcosts.costs.
ABC is a
good supplement
to our traditional
cost system
I agree!
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Cost of Idle Capacity
Traditional CostTraditional CostAccountingAccounting
The predeterminedThe predeterminedoverhead rate is basedoverhead rate is basedon budgeted activity.on budgeted activity.
This results in applyingThis results in applyingoverhead costs ofoverhead costs ofunused, or idle, capacity.unused, or idle, capacity.
Activity BasedActivity BasedCostingCosting
Products are chargedProducts are charged
for the costs of capacityfor the costs of capacitythey usethey use not for thenot for thecosts of capacity theycosts of capacity they
dont use.dont use.
Idle capacity is chargedIdle capacity is chargedas a period Cost thusas a period Cost thus
not charged to products.not charged to products.
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Linear Programming - Idle Capacity
Step 1:Define linear profit Function. The Function maximisedthe profit
Step 2: Define the Constraint representing the limited activitycapacities like b1 b3 for individual activities x1,x2.. xn
Eliminate those products that consume ahigh and over-proportional part of the
overhead departments capacities.
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In Business | Traditional Costing Accounting
Labor
M/C
Material
Direct Labor Cost
+ Overhead cost
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In Business | Activity Based Costing (ABC)Changes the Focus
Labor
M/C
Material
Direct Labor CostSystem = 9%
+
Other Activities
Product
Development
Product
Launch
Marketing
Sales
10 %
The new information produced by the ABC study also helped Euclid in its relations withcustomers. The detailed breakdown of the costs of design and engineering activitieshelped customers to make trade-offs, with the result that they would often ask thatcertain activities whose costs exceeded their benefits be skipped.
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How to Calculate Cost of Idle Capacity by ABC ?
Presentation / Author / Date
Z Mobile company makes two phone of two different model :
Model A
Model B
Step:1 Identify the main activities in the organization
1. Machine Maintenance 400
2. Quality Control 600
Total Overhead of the firm = 1,000
Step 2 Identify factors which determine cost (Cost drivers)
Model A Model B Total
Number of Machine Hour 6 4 10
Number of Inspections 3 7 10
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Step 3 : Collect the cost of each activity (Cost Pools)
A+B
Overhead of Machine Maintenace 400
Number of Machine Hour 10
Rate per unit machine hour 40
A+B
Overhead of Quality control 600
Number of Inspections 10
Rate per unit Inspection 60
Step 4: Charge support overheads to product on the basis of their usage of theactivity
M M
N M 6 4
Rate per unit Machine 40 40
Overhead per product 240 160
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Model A Model B
N mbe of Ins e ons 3 7
Ove e d of Qual y control 60 60
Overhead per product 180 420
Final Result
Ove e M el M el
L ke t M te e t vity 240 160
Linke t Q lity nt l 180 420
T t l Ove e s 420 580
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Management Functions Idle Capacity
- Product Portfolio Management- Handing Seasonal nature of Products and rising cost in fixed Capacity
- Eliminate products consuming high and overhead costs
- Managing Demand Flexibility
- Product Costing Overhead optimization- Informed Decision making
- Optimizing the overheads
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