![Executive summary<br />Capacity Utilization2000 – 2009; 42 year lifetime averageSource: Federal Reserve http://www.federalreserve.gov/releases/g17/In December 2000 the Federal Reserve’s Capacity Utilization Report stood at 80.1. With the recession of 2001 – 2002, the index fell rapidly in 12 months to a low of 73.5 in December 2001. It then began steady growth, rising steadily for 38 months, reaching 80.2 in February 2005. The index then stayed near or above 80 for more than three years, finally breaking that mark to 79.8, in March 2008. It then plummeted for 15 months, reaching a lifetime low of 68.3 in June 2009. Only recently have signs of recovery been seen, with the most recent release at 72.2 for February 2010 (see chart).<br />Looking at the average annual index value for the past 42 years from 1967 (when the series started) to 2009, you will find that it stands at 81.1. It is not a leap to argue that there has been a shift in the economic environment. This means that many of the assumptions that have guided firms for over 40 years, no longer hold true.<br />The question becomes, what can you do to ensure that your firm, via its systems, communicates this changed environment throughout your organization in a manner that enables your organization to respond in a productive manner? One of the most important tools at your disposal lies in one of the most fundamental - the design and maintenance of your cost accounting systems (referred to generically as “cost”).<br />Too often, cost has been treated as an afterthought – strictly an inventory valuation tool, quietly adjusted and managed by the accounting group, of moderate interest to upper management, with little to contribute to the achievement of strategic objectives.<br />This paper will show how your cost systems can be a key competitive advantage. It will discuss four essential tuning issues, and, in the addendum, how to use the application of similar concepts in a warehouse:<br />,[object Object]](https://image.slidesharecdn.com/costsystemtuning-110518223937-phpapp02/85/cost-system-tuning-in-todays-economy-1-320.jpg)
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Cost System Tuning in Today's Economy
- 2. Defining a capacity policy and its integration to your existing systems.
- 3. Establishing a culture of variances to drive improvement – including batch-related costs.
- 4. Managing cost system impact on pricing.
- 6. Provide process control information so managers can take corrective actions.
- 8. Capacity is not fixed, nor is capacity cost.
- 9. Indirect costs impact capacity – activity-based concepts must be incorporated.
- 10. Capacity calculations are integral to a well functioning cost system
- 12. Practical capacity – theoretical capacity reduced by unavoidable interruptions (shifts of operations, sick leave, etc.)
- 13. Normal capacity – a demand based measure of utilization required to satisfy demand over a long term.
- 15. Product mix continuously changes
- 16. Processes are not consistent, or have been modified or changed in some manner
- 17. Indirect overhead activity is significant or even more than direct labor
- 20. The routing history file. Many times the work order history file is separate from the routing history. By linking the two, work center utilization can be determined.
- 21. General ledger detail file. You need to know the fixed and variable costs that will be assigned via your cost system. In addition, you will need to pool up costs in an appropriate manner to capture the costs of indirect activities that are driven by the batch or order.
- 24. Looking to the variance reporting, managers are encouraged to find a means to reduce the variance on a SKU basis, such as by reconfiguration of space and improved attention to production lot sizes.
- 25. As always, a tension exists between the amount of inventory on hand and the capacity variance. Management judgment, coupled with the proper performance measures (inventory turns, for example) are essential.