Week 3 - Micro Devices Division

1. The “excess” capacity of the facility is associated with four causes
Long term yield: the solution is to change the calculation into the new available capacity. With the production that exceeds the demand we could have an improvement in marketing and selling part. Also, can have a discount rate for large quantity selling or cash payment, etc
Short term yield: The company should hold extra capacity in order to make up for statistical fluctuations in earlier operations. A buffer inventory will protect constraint from a work shutdown caused by a shortage of processed materials coming from upstream workstation or by the fluctuation of the demand
Product mix changes: Introduction of new products could lead to the purchasing of additional equipment which lead to an incremental increasing in fixed cost. Therefore, we should careful consider whether we should put the project in to implementation or not or whether the revenue could cover the increasing in fixed cost.
In-sourcing decision: if the company want to add the latest technology in the product, they should not consider the in-sourcing because it affects key partnerships – semiconductor supplier

2. If excess capacity costs are excluded from product cost, how should these excess capacity cost be accounted for and made visible to management?
The excess capacity arises due to larger productivity or due to imbalanced equipments within the department. The overhead rate and decision making should include the cost of idle Capacity, but should exclude the cost of excess Capacity and counted on profits/losses

3. What definition of capacity should be used for product costing purposes – theoretical, practical, normal, actual?
Normal capacity represented the average actual utilization over a time period long enough to level out capacity highs and lows. It emphasize on