Consider how the choice among normal capacity utilization, master-budget capacity utilization, and practical capacity affects how a company evaluates its marketing manager. Normal capacity utilization is often used as a basis for long-run plans. Normal capacity utilization depends on the time span selected and the forecasts made for each year. However, normal capacity utilization is an average that provides no meaningful feedback to the marketing manager for a particular year. Using normal capacity utilization to judge current performance of a marketing manager is an example of a company misusing a long-run measure for a short-run purpose. The company should use master-budget capacity utilization, rather than normal capacity utilization or practical capacity, to evaluate a marketing manager’s performance in the current year because the master budget is the principal short-run planning and control tool. Managers feel more obligated to reach the levels specified in the master budget, which the company should have carefully set in relation to the maximum opportunities for sales in the current year.
When large differences exist between practical capacity and master-budget capacity utilization, several companies (such as Texas Instruments, Polysar, and Sandoz) classify the difference as planned unused capacity. One reason for this approach is performance evaluation. Consider our Stassen telescope example. The managers in charge of capacity planning usually do not make pricing decisions. Top management decided to build a production facility with 12,000 units of practical capacity, focusing on demand over the next 5 years. But Stassen’s marketing managers, who are mid-level managers, make the pricing decisions. These marketing managers believe they should be held accountable only for the manufacturing overhead costs related to their potential customer base in 2020. The master-budget capacity utilization suggests a potential customer base in 2020 of 8,000 units (2/3 of the 12,000 practical capacity). Using responsibility accounting principles (see Chapter 6), only 2/3 of the budgeted total fixed manufacturing costs would be attributed to the fixed capacity costs of meeting 2020 demand. The remaining 1/3 of the numerator would be separately shown as the capacity cost related to increases in long-run demand expected to occur beyond 2020.*