What is Budgeted Capacity?

Budgeted capacity is the best estimate of production volume planned for a future period. This amount may be expressed in aggregate hours of available production capacity, or just the planned hours that will be available at the bottleneck operation. Budgeted capacity is used to estimate likely sales levels, as well as to calculate a planned overhead application rate.

Example of Budgeted Capacity

Wilson Electronics is a mid-sized company that manufactures high-end audio speakers. As the company prepares its financial and operational plans for the upcoming fiscal year, the production planning team works closely with sales and finance to determine the budgeted capacity for their main production facility. This process begins by evaluating sales forecasts, historical demand trends, and any upcoming product launches or promotions that could influence sales volume.

The production facility operates on a standard schedule of one shift per day, five days a week, for 48 weeks per year (allowing four weeks for maintenance and holidays). Each shift consists of 20 workers, each working 8 hours per day, resulting in a maximum theoretical capacity of:

20 workers × 8 hours/day × 5 days/week × 48 weeks = 38,400 labor hours per year

However, management recognizes that actual output is constrained by a bottleneck operation—the final speaker assembly line—which can only handle 60 completed units per day. Based on this bottleneck, the team calculates that the realistic production volume for the year is:

60 units/day × 5 days/week × 48 weeks = 14,400 units per year

Given expected orders from retailers and distributors, the sales team forecasts a realistic sales volume of 13,500 units. To align with demand while allowing a small buffer for last-minute orders and rework, the company sets its budgeted capacity at 14,000 units for the year.

This budgeted capacity is used by the accounting department to establish a planned overhead application rate. If the company’s estimated fixed overhead costs for the year total $2.8 million, the overhead rate is calculated as:

$2,800,000 ÷ 14,000 units = $200 per unit

This planned rate will be used to allocate overhead costs to each unit produced during the year, helping the company maintain accurate cost estimates and make informed pricing and production decisions.