What Is an Activity Capacity?

Osmand Vitez
Osmand Vitez
Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Activity capacity represents a company's total projected output under normal operating conditions. Manufacturing operations are often the companies that use this business concept the most. Normal operating conditions are a set of standards that allow a company to use materials, labor, and overhead to achieve specific production goals. These standards are often different for each manufacturer, though a general idea of normal standards exists. Cost accounting, activity-based management, and total quality management techniques help a company achieve activity capacity.

Three different resource groups are necessary to maintain activity capacity and turn raw materials into usable goods or products with natural consumer demand. Direct materials include all physical inputs that a manufacturer must have to produce goods. Labor represents the individual workers who transform raw materials into the finished or final good. Overhead is any item that directly or indirectly affects the production system. Items in this latter category include utilities, indirect employee salaries, equipment depreciation, and property taxes.

Cost accounting is a primary tool companies use to measure business processes that affect a manufacturer’s activity capacity. Managerial accountants review all production activities from a financial standpoint using different tools to complete this process. A major thrust of cost accounting is to look for any production waste that overextends the company’s production budget. Higher costs due to wasted spending often reduce a company’s ability to meet production output goals. The efficient use of capital allows the company to meet or exceed activity capacity under normal operating conditions.

Activity-based management represents a managerial mind-set that changes the operational management side of manufacturing. Owners and managers develop a set of managerial processes to achieve activity capacity. Processes include finding quality resources in abundance through reliable suppliers, creating a natural work flow to produce goods in a logical manner, and reviewing all production activities to make changes for improving production. The purpose of this managerial mind-set is to manage all activities in a system. This can be a change from managing individuals or one piece of a production system.

Total quality management is another option for managing and improving activity capacity. This classic business management tool uses both internal and external information to meet capacity. Internal information comes from leadership, strategic planning, training, and employee involvement. Outside information-related activity capacity includes customer involvement and feedback. Each of these individual pieces combined allows a manufacturer to review numerous information pieces that affect a company’s activity capacity from both a supply and demand viewpoint.

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