Summary for Activity-Based Costing and Capacity In this article written by Robert Kaplan, Activity -Based Costing method has been upgraded to a level that can better assist the need for an organization. The article began with the introduction of traditional Activity-Based Costing method, along with the emphasis on its two major pitfalls: lack of future elements and actual capacity levels. Then the author suggested two solutions to conquer the pitfalls by using budget cost and practical capacity to calculate Activity -Based Costing. I will attach some personal experience at the end of this summary to address my learning experience for this article. At first, the author summarized the basic steps of calculating activity-based activity: starting with the tracing the resource expense to activities, followed with obtaining the quantitative data on the output of each activity, ended with measuring how much of each activity's output was used by each product or customers. However, based on this historical method, the author pointed out there are two major pitfalls existed in this traditional ABC system. One is the actual cost-driver rate is not able to be calculated until the period is over, which leading the cost manager to be questioned by its ability to predict future cost by using the same system. The other pitfall is the cost -driver rate in traditional ABC system is not accurate when the resources performing the activity is under full capacity, which leading the cost of the resources to be allocated unfairly among activities. To solve the first pitfall of traditional ABC, the author suggested using the budged expenses for resources in the upcoming period to estimate the cost for the activity. By implemented this new steps, a ABC system enables the cost manager pro-actively to estimate the cost of activities that will be performed in current and future periods. Ultimately, the new system using budged expense to help the manager to make decisions with more relevant data in the current and future periods. To solve the send pitfall of the traditional ABC, the author suggested using practical capacity of the resources supplied instead of actual recourses supplied. This is the main discussion part of the article. To explain the inaccuracy embedded in the old system, the author first pointed out the fixed cost for the resources will remain the same indecently from the change of production level. The efficiency of the activity will remain the same despite of the order volumes. This means the cost-driver rate should reflect the same efficiency of the process- how the cost is being handled for each customer order. Based on the calculations, managers can either reduce the supply of resources for performing the activity or increase the quantity of revenue-generating activities performed by the resources. The author provided us a very detail explanation for how to apply the practical capacity in real life operations. First we have to identify the difference between practical capacity and theoretical capacity. In the scenario of unused capacity arising from the lumpiness of asset acquisition, we will only use the actual capacity as the practical capacity instead of the real capacity of the machine's production level. Even in a more variation case that the demand is expected to build over time; we should use the same practical capacity (maximum level) as the denominator volume and assign the unused capacity to the investment account or written off as unused capacity. In the scenario of seasonal and peak-load demands, we should use the actual capacity and cost for the slack-demand period, and use the unused cost+ the actual cost/actual unit to calculate the peak period driver rate. The unused cost can be assigned to the activity that actually required the cost instead of among all activities in a flat rate. In conclusion, the unused cost can be assigned to the activity that actually required the cost instead of among all activities in a flat rate by using practical capacity. Managers can now better judge the efficient of each product line and make better decisions based on the more accurate ABC system. I personally think it is a very reasonable and functional upgrade for the traditional ABC system by implementing the budgeted expense and practical capacity into the new ABC calculation.