be prsentation v1.0

8/8/2019 BE Prsentation V1.0

1/15

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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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For IIFT MBA 2010 - 2013 Presentation / Author / Date

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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For IIFT MBA 2010 - 2013

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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