Case Study Cost Of Excess Capacity 235

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Cost of excess capacity 235,600

Excess capacity cost is there when the demand is not proportional to the full running capacity of the company. The cost objects in Activity Based Costing focuses on cause and effect relationships where the company’s actual activities lead to its costs. The cost of excess capacity cannot be determined as a cost object in ABC model as it has no definite relationship to an effect leading to a cost driver object and thus explaining the cost and effect relationship. The cost of excess capacity on the other hand is named as the cost of flexibility for the company. Every organization is bound to face some cost of

It has all the activities which might not play a direct role in one production cycle but are imminent for maintenance of the overall company’s production. In value chain analysis, the goal is to analyze the linking of the overall value creating activities of the firm and then search for areas for improvement and cost cutting, thus leading to competitive advantage. The support activities in the value chain analysis are diagnosed to the sub activities which are being linked to the value creation paradigm of the firm. On the other hand, the activity based costing requires a complete understanding of the support activities and their resources. Individual overhead of support work are distributed differently for different products as one product may consume more of support resources than another. Traditionally, in value chain analysis the overhead is not calculated in such depth. Overall, the support activities are added in much detail in ABC model including the costs of plant security to the insurances etc. This much detail and classification is not achieved in value chain analysis where the main motive is to include activities only which are linked appropriately in the value creation process. Thus ABC model digs way deeper in support activities to get know of the cost to cost driver component of every existing activity and make their understanding far better for a firm as

One of the foremost principles of lean philosophy is to specify value for customer. In the present scenario, the hotel management needs to survey first the demand of food service availability for the customers from 11pm to 5pm. If the survey gives the positive outcome, then the management needs to set the menu options for breakfast, dinner etc. and all options which are well suited to the demands. Next principle is to specify value stream with minimizing non-value activities to the most. The hotel management needs to dedicate only the needed staff and equipment for only the most predicted settled menu. More of the restaurant famous dishes should be incorporated in the menu, for enduring customer value with experienced dishes. The staff should be reduced and increased according to the researched demand of the customers regarding time of the day. Example is that fewer orders are made during the night, so the dedicated staff should be reduced accordingly. The next principle is the flow of value from one step to another in a tight manner, with minimizing the non-value adding steps. The food service should be serving hot food at any hour with tightly coupling the cooking and delivery activity. The last is to include a customer pull system where the product should only be created when the customer demands for it in order to lower inventory costs. In food services, there are a lot of food