Accounting Best Practices, Fifth Edition

9–12. Track Excess Capacity

The typical company has excessive production capacity in multiple production operations, which are constrained by just a few bottleneck operations. Company management may not realize the extent to which some of its asset investment is underutilized, which can seriously impact the company’s return on investment.

A solution is to track excess production capacity by work center or individual machine or person. By doing so, management can ascertain if some assets or employee positions can be eliminated or even outsourced. However, there are some issues with this best practice. First, the excess capacity reporting must take into account the maximum levels of usage that occasionally occur. For example, a machine may work at only 15% capacity on average, but have periodic bursts of activity reaching near 100% of capacity when certain types of products having unique machining requirements are scheduled for production. In these cases, the excess capacity level should be graphed on a timeline, so that management can see the level and duration of these capacity utilization spikes. If the spikes are of short duration, management may conclude that it can still eliminate some assets and simply outsource the excess levels of work.

A second problem with excess capacity reporting is that management will have a tendency to use it to eliminate all excess assets, resulting in a “balanced plant” where there is exactly enough capacity throughout the facility. The trouble ...