Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 15

Cost of Capacity (Continuation of 5-61) Use the same information as above for Coffee Bean, Inc. (CBI) except assume now that Mona Loa and Malaysian are the only two products at CBI. Also, now include the following additional information about the practical capacity Coffee Bean has in each of its activities. For example, currently Coffee Bean has total practical capacity for processing 1,400 purchase orders, 2,400 setups, etc. These are the levels of activity work that are sustainable.

Activity	Practical Capacity
Purchasing	1,400
Materials handling	2,400
Quality control	1,200
Roasting	100,000
Blending	36,000
Packaging	30,000

Required

1. Determine the activity rates based on practical capacity and the cost of unused capacity for each activity.

2. Explain the strategic role of the information you have developed in part (1) above.

3. Assume the same information used in parts (1) and (2) above, but now assume also that the costs in the purchasing activity consists entirely of the cost of 8 employees; the cost in materials handling consists entirely of the cost of 20 employees; the cost of quality control consists entirely of the cost of 4 employees; the cost of roasting and blending consists entirely of the costs of machines—10 roasting machines and 10 blending machines; and the cost of packaging consists entirely of the cost of 3 employees. Based on this additional information, what can you now advise management about the utilization of capacity?

Step 1 of 7

Cost of Capacity:

Cost of Capacity means the expenditure incurred for the expansion of the business operation or in other words it’s the cost incurred by the organization to expand its business capacity to do the business operations. Cost of Capacity is fixed it will remain constant if there is any variation in the production. There are two types of costing used to measure the cost of capacity. They are Activity Based Costing and Volume Based Costing.