Reviewed by Gloria L. Vollmers University of Maine
McNair and Vangermeersch combine forces and expand on their prior work for the Society of Management Accountants of Canada and the Institute of Management Accountants (Measuring the Cost of Capacity: Management Accounting Guideline #42) as well as on their individual efforts in both the area of capacity management and cost accounting history. The book takes advantage of McNair’s extensive work as a consultant and Vangermeersch’s encyclopedic historical knowledge of cost accounting in an unusual presentation of the issues surrounding capacity, “the value creating ability of an organization” [p. 1], which defies attempts to measure it. The crux of the story is, that because of continually increasing global competition, effective usage and management of capacity is key to profitability, and effectiveness requires that capacity be measured despite difficulties doing so. The firm unable to make increasingly better use of its capacity is likely to be swallowed by its considerable cost.
The authors divide the book into three parts. The first part contains six chapters that introduce capacity terminology and discuss capacity management in the short term (operational), in the intermediate term (tactical), and in the long term (strate-gic). The second part, with five chapters, examines the capacity literature in the U.S. during five periods (1900-1919, 1920-1932, 1933-1952, 1953-1978, and 1979-present). The final part is an annotated bibliography of literature emerging from those periods. Some of the literature is used extensively in the second part of the book. Though these divisions are structural, there is a considerable integration of history and current capacity information throughout. It is worth noting that the literature used is not confined to accounting sources.
The definitions or categories of capacity use are eyeopening. Total capacity assumes 24 hours, seven days a week of production. Productive capacity is the only use of that capacity that creates value. The rest is waste. Excess capacity is capacity idle because there is no current market for potential output. Planned idle capacity arises from a temporary lack of demand, routine maintenance, etc. Unplanned idle capacity occurs because of a lack of materials, breakdowns, rework, etc. [pp. 30-31]. What the authors claim is that firms use less than 30% of their total capacity [p. 78]. They also argue that theoretical capacity is the only justifiable baseline from which managers should think about capacity because only by understanding the extent of its potential and assigning it a cost, can they begin to manage it effectively. What is not measured is not seen.
The chapter on operational perspectives reviews models of capacity measurement currently used by firms. These include various materials requirements planning (MRP) models, as well as just-in-time or cellular manufacturing and the theory of constraints. These models emphasize throughput while minimizing other costs. The short-term perspective, assuming a market for goods, says that since capacity costs are largely fixed, and direct costs fixed per unit, the profitability of the firm lies completely in its ability to produce to cover capacity costs. To compete on price in a free market, production must be maximized.
The intermediate term, or tactical perspective, recognizes that while capacity costs cannot be reduced, they can be man-aged over multiple time periods by looking at how work is done (effectiveness) and what type of work is done. The models for this level of management vary greatly in their complexity, including normalized costing, activity-based costing, capacity variance analysis, the resource effectiveness model, the cost containment model, and elementary analysis within the CAM-I and CUBES approaches. The keys here appear to be the willingness and effort to identify and measure the sources of nonproductive time (waste) and to translate these measurements into dollars. A cost seen is a cost that may be controlled through process or other design changes.
On the strategic, long-term level, all costs are controllable. The models available at this level are CUBES, CAM-I, and re-source effectiveness. The variety of decisions made at this level include: make or buy, buy or lease, expansion of capacity, reduction of capacity, outsourcing, joint ventures, alliances with suppliers (and others), and major product-mix change decisions. Here planning must be done carefully because the decisions made at this level can lock the firm into cost structures for long periods of time. The authors warn that it is far easier to expand a plant and add costs than to reduce it and eliminate costs. For example, assets made redundant by outsourcing may take a long time to sell.
Although the authors integrate history throughout the book, the historical chapters provide for a considerable review of the major capacity discussions that occurred during the century and the economic and political influences on the discussions. They seek to explain when and why capacity was a major topic, how authors recommended handling it, why it disappeared from the literature, and why it has reappeared in the last decade or so. For example, early in the century, substantial investments in machinery led engineers and accountants to recommend tracking the idle time of machines and expensing it as a line item on the income statement as a management tool.
Probably the most controversial part of the book is the conclusion that the New Deal’s National Industrial Recovery Act (NIRA), with its emphasis on full cost recovery as a basis for setting prices, doomed thoughtful and useful capacity management for decades to come. While intriguing, there are multiple alternative and/or correlated explanations of why this occurred. One cannot conclude that the NIRA was the primary reason. McNair and Vangermeersch do not ignore the other reasons (e.g., financial accounting’s growing prominence and its reliance on full absorption costing and the matching principle) but place primary responsibility on the NIRA. Nevertheless, their arguments deserve discussion.
Global competition, demanding continual cost reductions, has driven the reemergence of interest in capacity and capacity reporting in the 1980s and 90s. The rush to lean production (just-in-time/cellular manufacturing) led to a focus on quality and the reduction of waste as well as the rebirth of activity-based costing and the theory of constraints. All are interrelated in that understanding one’s costs and sources of waste should lead to control and greater profitability. The authors would like modern management to know that these issues are not new and that much can be learned from the writers of the past. Perhaps their solutions can be applied to the present.
This book is enjoyable and potentially an excellent source for educators who want to discuss capacity and who welcome an opportunity to integrate historical perspectives. The anno-tated bibliography can easily be used for class assignments — comparing an article from the 1910s to one written today. Some examples casually put forward may prompt argument, such as the Lucent Technologies and Babson College partner-ship to provide an educational program Lucent wants. Is it possible that such linkages might damage the academic cred-ibility of the college? The insistence that theoretical capacity be the basis for measurement, and likely the denominator volume for certain overhead costs, will prompt lively discussions about its impact on performance and performance measurement as well as theoretical arguments about what to do with the massive underabsorbed overhead. This enjoyable and unique book could be the capstone of a cost accounting course because of its integration of ABC, TOC, overhead allocation, waste, quality, and many others topics that have entered the curriculum. The many examples of real companies enrich the book and fill the practical needs frequently expressed by students.
