CHAPTER 14 THE PRODUCTION CYCLE SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 14.1. When activity-based cost reports indicate that excess capacity exists, management should either find alternative revenue-enhancing uses for that capacity or eliminate it through downsizing. What factors influence management’s decision? What are the likely behavioral side effects of each choice? What implications do those side effects have for the long-run usefulness of activity-based cost systems?

It will often be easier to identify opportunities to downsize and eliminate jobs than to find creative value-adding activities for excess capacity. Thus, management may be more likely to eliminate excess capacity than to redirect it to new tasks. This can have serious negative effects on both employee morale and the long-run survival of the firm. When employees are let go, their knowledge and customer relationships go with them. Some consultants argue that such soft knowledge is a company’s most valuable asset and, therefore, that downsizing is likely to have negative long-run consequences. If management uses ABC systems to justify downsizing, there is likely to be a backlash against and distrust of such systems by many managers. Instead, managers should seek to find new opportunities to productively make use of excess capacity. This can involve creating teams to look for ways to improve processes and cut costs. It is also useful to build-in resources for ongoing maintenance. Finally, it is critical to focus on “practical” capacity rather than “theoretical” capacity, recognizing that neither humans nor machines can function productively 100% of the time – there needs to be