Capacity Utilization and the BEFCU model: A Field Study

The few management accounting pricing methods in the management accounting literature are ineffective in helping small firms use their idle capacity during lingering economic recessions, and some of these methods may even worsen this problem. Extending the traditional break-even-cost-volume-profit model, we derive a more effective pricing method, the break-even-full-capacity-utilization (BEFCU) model, to handle this problem. Seeking full capacity utilization, the BEFCU model has two characteristics: (a) highlighting the importance of the exigent fixed cost category for utilizing idle capacity and (b) using a functional cost structure that focuses on a hierarchy of value drivers in the firm's value creation process. Accordingly, under the BEFCU model, management has an instrumental pricing continuum extending from the minimum acceptable BEFCU sale price to the regular sale price. To demonstrate its practicality, the authors apply the BEFCU model to an actual job shop. This model integrates certain strategies based on built-in flexibility in commitments with suppliers and customers and maintaining a mode of conservatism in accounting for plant assets. The model can also help small tooling companies currently seeking entrance into China; it may take a while for these companies to gain a foothold in this new market because copyrights and other legalities are rarely enforced (Bunkley, 2004).