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Excess Capacity

Many industries have excess capacity.

Among them are the airline and telecommunications industries, as well as several manufacturing industries, such as steel, aluminum, and aircraft manufacturing.

Some management accountants argue that absorption costing provides an incentive to continue producing goods for inventory, even when sales decline.

They go on to suggest that this incentive problem is alleviated if throughput costing is used.


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Excess Capacity

Excess Capacity:
In the market, the capacity of producing goods and products of the company is dependent upon the demand of the market. It is the capacity utilization in which the capacity of the company is based upon the demand of the market. Demand of the product is the effective desire, which can be fulfilled. It means that desires are simply imagination, they may not be fulfilled. Demand presupposes the presence of resources and the willingness to part with the resources to satisfy the desire. As the market demand goes high, the capacity utilization also goes high and if the demand goes low then the capacity utilization will fall. So we can describe the excess capacity as the insufficient demand of the market which exists due to the warrant expansion of the output. (Siddiqui, 1997)
In this situation, the firm is not able to fulfill the demand of the market because actual production is less than the demand. The services and products of the following industries such as: telecommunications, airlines, aircraft manufacturing, aluminum etc. are very essential in the daily life of the consumer so the condition of excess capacity in these industries is an obvious thing. When the marginal cost of the company is less than the average cost of the company then ...

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