Posted in Finance, Accounting and Economics Terms, Total Reads: 384
Definition: Activity Capacity
Activity capacity is the known or projected capacity of an activity over an extended period under the standard operating conditions. It measures an activity's anticipated performance by taking into consideration the various variables It is measurable in various terms. like if it is factory producing shoes, the capacity can be measured in number of shoes.
Example: The rate of output for a machining activity measured as 500 cycles per hour.
If all the activity capacity acquired is not used, then we have the unused capacity which is the difference in the acquired capacity and the actual activity output.
Activity capacity – Capacity used = Unused capacity
The expenses associated with these activity capacities are fixed expenses. The costs incurred to provide the long-term activity capacity are known as the committed fixed expenses. In the short run, they are not subject to change. It includes of purchasing of a long-life asset or entering into a long-term contract like buildings and equipment, either purchased or leased. While the costs incurred for the acquisition of a short-term activity capacity are known as the Discretionary fixed expenses. They are not dependent on the actual usage of the activity, but the level of the usages can be changed quickly. Its example is salaries of the employees, because if there is a short-term decrease in the production levels, the workers can not be laid off
Unfortunately, the complete level of capacity isn’t attainable. We need to take into account the unavoidable. It leads us to the practical capacity. It is the level of capacity that includes unavoidable losses of operating time like maintenance of machineries; holidays etc. it is always less than the actual capacity.