Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
departments). The cost model used in the pilot implementation is depicted in Figure 1 of the article.
Idle capacity costs (6% of total) were excluded from the cost base.
Replacement-cost depreciation was used for product-costing purposes.
4. What do the authors propose as the primary advantages of the RCA system piloted at the
Augusta, KY plant of the Clopay Plastics Company?
A comparison of RCA to traditional cost systems is provided in the upper portion of Table 1 in the
article. Specific benefits that Clopay realized with its RCA implementation are summarized in the lower
portion of Table 1.
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
15-7: “Better Information through the Marriage of ABC and Traditional Standard Costing
Techniques” by William W. Stammerjohan, Management Accounting Quarterly (Fall 2001), pp.
15-21.
This article recommends extending traditional standard cost variance analysis for overhead to an ABC
setting. As such, it attempts to provide a bridge between a traditional financial-control model (the use of
standard costs, flexible budgets, and standard cost variance analysis) to a more contemporary setting: the
use of activity-based cost (ABC) systems.
Discussion Questions:
1. Provide an overview of traditional standard cost variance analysis for manufacturing (factory)
overhead costs.
As noted in the article (and in Chapter 15 of the text—see Exhibits 15.6 and 15.7), the total factory
overhead variance for a period (also referred to as the total over or under applied overhead for the
period) is defined as the difference between the actual overhead costs incurred and the standard
overhead costs charged to production. This total variance can be decomposed using a two-way, a three-
2. According to the author, what are the primary limitations of traditional standard overhead
variance analysis?
a) Inability to model/track multiple cost drivers associated with the incurrence of manufacturing
overhead costs, and their subsequent assignment to products/services produced.
b) Failure to properly model underlying cost functions, e.g., the use of unit-level (or volume-based) cost
q
3. What is the essence of the author’s recommended approach for amending traditional variance
analysis?
methods?
Essentially, the author proposes a refinement to traditional standard cost variance analysis for overhead.
Of particular importance is the separate treatment of unit-level from batch-level overhead costs and
their related variances for a period. (See Tables 4 and 5 for a summary of the overhead cost variances
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
4. What recordkeeping (i.e., information-processing) costs are associated with the revised system
recommended by the author?
To take full advantage of the more detailed techniques recommended in this article, it will be necessary
for companies to continually update the standard quantities and the standard prices of resource inputs.
The standard production hours, standard setup hours, and standard prices for labor, indirect materials,
and utilities must be reviewed constantly because of continual improvement, learning curves, and
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
Reading 15-8: “No Equivocating—Expense Those Idle Capacity Costs” by Sid R. Ewer,
Craig Keller, and Stevan K. Olson, Strategic Finance (June 2010), pp. 55-59.
A few tiny words can sometimes have a big impact, especially when it comes to accounting standards.
And it isn’t just when words are added—it can also be a big deal when they disappear. Some seemingly
minor changes to SFAS No. 151may end equivocation when it comes to expensing the cost of idle
capacity.
Discussion Questions:
1. According to the article, what was the overall purpose of SFAS #151 (“Inventory Costs—An
Amendment of ARB No. 43, Chapter 4”)?
intended to close one of the gaps that exist between International Financial Reporting Standards
(IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). As stated in paragraph A2 of
SFAS No. 151, the Statement brings us closer to the goal of “a single set of high-quality accounting
standards.” The article uses “SFAS No. 151” in discussing these issues, but the wording of SFAS No.
151 can be found in the Codification in Section 330-10-30, paragraphs 1-8.
2. What are the principal accounting changes associated with SFAS (i.e., in what respect does SFAS
#151 amend ARB No. 43, Chapter 4)?
For fiscal years beginning after June 15, 2005, companies are subject to the changes brought about by
SFAS No. 151. These changes relate to accounting for inventories, and are summarized by the authors
in Table 1 of the article. Basically, SFAS requires that in determining the fixed overhead application
rate (for inventory-costing purposes), the rate be based on “normal capacity” (i.e., the “denominator
volume” level should be “normal capacity,” not expected or actual capacity usage, theoretical capacity,
3. What examples of “abnormally low” production/output are provided in SFAS No. 151?
4. According to the authors of this article, what are fours ways of “ameliorating” the effects of
SFAS No. 151 (in terms of the need to charge as current-period expense the ongoing costs related to
abnormally low production or idle plant)?
1. Finding alternate uses, production, or service for otherwise idle plants, property, and equipment.
Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
investment category. This would then remove the associated depreciation cost out of the overhead
rate calculation.
3. Asset write-down: if the company determines that an “asset impairment” has occurred, it could
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
Reading 15-9: “Idle Capacity Costs: It Isn’t Just the Expense,” by B. Bettinghaus, M.
Debruine, and P. R. Sopariwala, Management Accounting Quarterly (Winter 2012), pp. 1-7.
SFAS No. 151 calls for manufacturing firms to report the abnormal level of unused fixed production
costs as a period cost and not include these costs in inventory. The authors of this article find that
normal idle capacity costs are quite large and relevant to investors. They also argue that these unused
fixed costs are made up of past, current, and future cash outlays, the composition of which should
vary widely across firms. Based on these observations, the authors argue that the current reporting
standard does not go far enough. They propose a standard that requires firms to recognize the expense
on the income statement and the idle assets on the balance sheet and to include disclosures detailing
the breakdown of the expense between cash flows and accruals.
Reading 15-9 can be thought of as a follow-up to Reading 15-8 by Ewer et al. (2010).
Discussion Questions
1. How would you summarize the main arguments made by the authors of this article?
As indicated in Reading 15-8, SFAS #151 requires companies to expense as period costs the cost of
“abnormal idle capacity.” The authors of Reading 15-9 assert that what can be considered “normal”
amounts of unused capacity costs (i.e., idle capacity costs associated with unabsorbed fixed
manufacturing overhead) is surprisingly large for some, if not many, companies. As such, they argue
that the disclosure of such costs may be investor-relevant and that these costs should therefore be
2. What evidence is offered by the authors that the disclosure of idle capacity costs is investor–
relevant?
The authors suggest that knowledge of “normal” amounts of idle capacity costs is relevant for
predicting future operating profits. To support their argument, the authors studied four automobile
manufacturers (GM, Ford, Toyota, and Honda). Specifically, they find that “We find that changes in
current year CU (capacity utilization) are negatively related to the next year’s gross margin.” Further,
the authors argue that “Because (projected) gross margin factors heavily into the determination of
company value and share price, company executives and investors should pay close attention to
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
3. In general terms, increased disclosures recommended by the authors are outlined above in
response to question #1. What are the specifics of the authors’ recommendations?
The authors begin with the observation that capacity costs for the auto companies examined consist of
three components: allocations of prior-period cash outlays (e.g., depreciation on plant and equipment),
current period cash outlays (e.g., salaries), and future cash outlays (e.g., post-retirement expenses
accrued in the current period). Thus, the authors argue that in addition to the total amount of capacity
(and by extension, idle capacity) costs being relevant, the mix or composition or breakdown of these
costs is potentially relevant, particular if (as the authors suggest) this mix varies across auto
companies. The following paragraph is particularly important in terms of its implications: “Fixed costs
at the domestic (auto) plants require more current and future cash outlays than those at the foreign
automaker plants with more capital-intensive assembly lines. Except as outlined in the next paragraph,
Thus, based on the above analysis and associated assumptions, the authors call for the following
expanded disclosures regarding capacity-related costs:
1. Disclose the cost of “normal” idle capacity costs separately on the Income Statement (rather than
In terms of items 1 and 3 above, the authors allude to Statement of Financial Accounting Concepts No.
5, “Recognition and Measurement in Financial Statements of Business Enterprises,” which states that
to be recognized in the financial statements, an item should meet the following four criteria: the item
under consideration should meet the definition of an element; it should be measurable; it should be
relevant to financial statement users; and, it should reliably represent the economics of the
transaction.” The authors argue that their recommended financial statement items (1 and 3 above) in
fact meet the above-stated criteria.
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
Reading 15-10: “A Guide to Integrating Revenue Management and Capacity Analysis,” by
Ronald J. Huefner, Management Accounting Quarterly (Fall 2011), pp. 40-46.
Companies of all sizes are limited by any number of constraints: capacity of their plants and other
physical structures, distribution channels, rules and regulations, size and education of the workforce, and
access to raw materials, to name a few. Yet it is often not the resources you have—but what your
organization does with them—that can make the difference between barely profitable and booming. This
article provides suggestions as how to make the most of your opportunities in this regard.
Discussion Questions
1. What is meant by the term “revenue management” and how does this topic relate to the topics
covered in Chapter 15 of the text?
As defined by the author, “revenue management” means “generating additional revenue by selling used
capacity profitability.” (emphasis added) Chapter 15 has, as one of its major themes, coverage of the topic
of resource-capacity management. Typically, this topic is discussed from the standpoint of driving down
cost per unit by increasing output volume. The present article looks at the issue of “resource capacity
2. What “contextual factors” does the author suggest as related to the importance and use of
“revenue management” techniques? That is, what are the primary characteristics of organizations
that have adopted revenue-management techniques?
The following characteristics are associated with the adoption of revenue-management techniques:
1. Capacity is fixed (at least in the short run): examples include airlines, hotels, golf courses.
2. Service capacity is perishable (services cannot be “inventoried” for sale at a later date; that is,
unused service capacity “expires”)
3. High degree of operating leverage (as discussed in Chapter 9 of the text, operating leverage refers to
3. According to the author, how can the CAM-I model be applied to the task of “revenue
management”?
The author identifies four components of “capacity”: physical capacity, personnel capacity, process
capacity, and purchase/supply capacity. Of these, the CAM-I model focuses on the physical capacity.
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Chapter 15 – Operational Performance Measurement: Indirect-Cost Variances and Resource-Capacity Management
Table 1 of the article presents a breakdown of rated capacity (total time) for a hypothetical restaurant
(Sara’s Table). The example shows that in a typical week the restaurant are productive 10% of the
available time, nonproductive 15% of the time, and idle 75% of the time. From a managerial
perspective, the linkage between this knowledge and increased profitability is stated succinctly by the
author: “Knowing how much of a business’s physical capacity is idle or nonproductive—and why—
can point to opportunities for revenue growth.”
4. List some specific action plans that could be taken by Sara to improve profitable revenue growth.
Pricing promotions (such as coupons or early-bird specials), could increase the number of customers,
5. Finally, provide a brief overview of the other dimensions of “capacity” (i.e., beyond what is
meant by “physical capacity”)
Personnel Capacity: Within the context of Sara’s Table, Table 2 of the article discloses that the total
personnel capacity is 140 hours per day, and that because the restaurant is not staffed at times other
than 4pm to 11 pm on the six days the restaurant is open, there is no idle capacity for personnel.
Purchases Capacity: This refers to the available supply chain for materials, supply, and externally
Two important points seem to stand out in terms of this article:
1. The topic of “revenue management” (or, previously, “yield management”) has not seen adequate
attention in the management accounting literature. Rather, cost management (or cost control or