Accounting Best Practices, Fifth Edition

5–3. Clearly Define All Capacity Levels

When creating a budget that contains major increases in revenues, a common problem is failing to reflect this change in the rest of the budget, resulting in an inadequate amount of staffpower, machinery, or facilities to handle the added growth. For example, a planned increase in revenue requires a corresponding increase in the number of sales staff who are responsible for bringing in the sales, not to mention a time lag before the new sales personnel can be reasonably expected to acquire new sales. Similarly, new sales at a production facility may result in machine utilization levels that are too high to maintain—has anyone thought of adding machinery purchases to the budget? This problem can be turned around and dealt with from the point of view of planned expense reductions, too—if the percentage of direct labor is budgeted to decline due to the use of automation, has anyone included the cost of the automation in the budget, and has a suitable time lag been built into the plan to account for the ramp-up time needed to implement the automation? Some of these problems are present in all but the best budget models.

The best practice that resolves this issue is the definition of capacity levels in the budget model. This can take the form of a table in the budget, such as the one shown in Exhibit 5.2. This example notes the capacity levels for staffpower, such as a specific number of shipments per warehouse worker, sales per salesperson, and ...