A Note on a Contribution Margin Approach to the Analysis of Capacity Utilization.

Abstract The article focuses on the analysis of capacity utilization. There is no evident consensus among cost accountants as to the usefulness of computing the fixed overhead efficiency variance. The efficiency variance is based on the assumption that a real loss in the use of fixed facilities occurs as a consequence of labor inefficiency. This would only occur under the rare circumstances where a plant operates at maximum capacity. Although currently the fixed overhead efficiency variances may not be an economic cost to the firm, at some future time when the master sales budget is closer to practical capacity, the fixed overhead efficiency variance may act as a constraint on the firm's output and thus reduce the sales volume available to the firm. Unused capacity is dichotomized into expected idle capacity used for evaluating the effectiveness of the master budget as a plan for the coming year and a volume variance used for evaluating the performance of the organization relative to the master budget. The capacity efficiency variance is a use of expected idle capacity. To the extent the capacity efficiency variance exceeds the expected idle capacity variance, the difference is a component of the volume variance.