Budgeted capacity definition

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 Manufacturing’s accounting staff is assembling its budget for the upcoming year. In its first draft of the budget, it states that no more than 20,000 hours of production work can be processed through the firm’s bottleneck operation. This figure is based on the firm’s historical ability to keep the bottleneck operation running at that capacity level through the use of three shifts, overtime, a dedicated maintenance crew, and constant oversight. This figure represents a hard cap on the ability of the company to increase its production volume, unless management wants to add to capacity in this area or outsource work.

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