Financial Analysis: A Controller’s Guide, Second Edition

Chapter 15. Capacity Utilization Analysis

Although capacity analysis is a relatively simple review to perform, most controllers do not attempt it, perhaps because it lies so far from the more financial applications in which accounting personnel are traditionally trained. Nonetheless, a proper application of capacity utilization analysis will reveal an abundance of information that leads directly to not only better utilization of equipment and processes, but also capital cost savings and improved profits. Thus, although the beginning analysis may seem far away from the realms of financial analysis, the end result is squarely on the bottom line of the income statement.

Relationship Between Profits and Capacity Utilization

Capacity utilization? Isn’t that the province of the production scheduling crew, and what could that possibly have to do with the duties of a controller? This section reviews the reasons why paying proper attention to capacity utilization has a very direct impact on both profits and cash flow, both of which are primary responsibilities of the modern controller.

Capacity is made up of either human or machine resources. If those resources are not used to a sufficient degree, there are immediate grounds for eliminating them, either by a layoff (in the case of human capacity) or selling equipment (in the case of machines). In the first case, a layoff usually has a short-term loss associated with it, which covers severance costs, followed by an upturn in profits, since there ...