Economies or diseconomies of scale , Managerial Accounting

Assignment Help:

Economies or Diseconomies of Scale

The costs of a value activity are often subject to economies or diseconomies of scale. Economies of scale occur from the capability to perform activities differently and more proficiently at larger volume, or from the capability to amortize the cost of intangibles like advertising and R&D over a greater sales volume. Economies of scale can result from efficiencies in the actual operation of an activity at higher scale as well as from less than proportional increases in the infrastructure or overhead needed to support an activity as it grows. In a bauxite mine, for illustration, real mining costs go downward less with scale than do infrastructure costs.

Economies of scale should be clearly distinguished from capacity utilization. Rising capacity utilization spreads the fixed costs of existing facilities and personnel over big volume, whereas economies of scale imply that an activity operating at full capacity is more proficient at larger scale. Mistaking capacity utilization for economies of scale can lead a firm to the false conclusion that its costs will continue to fall if it expands capacity once its existing capacity is full.

Rising complexity and costs of coordination can lead to diseconomies of scale in a value activity as scale rises. Whenever the number of lines in a metal can plant exceeds around 15, for illustration, the complexity of the plant becomes awkward. Increasing scale also sometimes dampens employee motivation and may increase wage or purchased input costs. For illustration, a large plant might have a greater likelihood of unionization or lead to high expectations and larger stridency of union negotiators. Diseconomies of scale in procurement can also take place if large needs meet an inelastic supply, forcing up input prices. Diseconomies of scale emerge to be present in most of the fashion-sensitive industries and professional services that rely heavily on fast response times and creative individuals who do not function fine in large organizations.

The scale sensitivity of activities differs broadly. Value activities like product development, national advertising, and firm infrastructure are usually more scale-sensitive than activities like procurement and sales force operations since their costs are heavily fixed no matter what the firm's scale is. Though, economies (and diseconomies) of scale can be found to some extent in virtually every value activity of a firm.


Related Discussions:- Economies or diseconomies of scale

Gross working capital, Financial decisions are depends on specific consider...

Financial decisions are depends on specific considerations the major being the cash flows, liquidity and cost. Short-term working capital decisions or financial decisions are diffe

Advance factoring and maturity factoring, Advance Factoring and Maturity Fa...

Advance Factoring and Maturity Factoring: In both recourse and non-recourse factoring whether the factor advances cash against book debts to the client instantly on assignment

results of quality improvements, At the starting of the year, Asquith Comp...

At the starting of the year, Asquith Company Ltd initiated a quality improvement program. The program was successful in decreasing scrap and rework costs. To help assess the impact

What is production cost, What is Production cost It begins with the sup...

What is Production cost It begins with the supplying of materials, labour and services and ends with the primary packing of the product. Therefore, it includes the cost of d

CVP, What is cvp?

What is cvp?

Correlation coefficient, Correlation coefficient (r) Correlation coeffi...

Correlation coefficient (r) Correlation coefficient measures the degree of association between two variables such as the cost and the activity level. r = nΣxy   -  Σx  Σy

Career as a ceo, Q. Career as a CEO? Are you a leader Would you enjoy s...

Q. Career as a CEO? Are you a leader Would you enjoy sometime becoming the president or chief executive officer (CEO) of the company you work for after that you should consider

Hold-up problem or another problem, According to the Philadelphia Inquirer,...

According to the Philadelphia Inquirer, in 2004 the city of Philadelphia planned to spend $14 million to convert the Convention Center into an appropriate venue for the Republican

Special order : Manufacturer, Viti Ltd, located in southern Viti Levu, manu...

Viti Ltd, located in southern Viti Levu, manufactures a variety of industrial valves and pipe fittings that are sold to customers in the eastern states. Currently, the company is o

Receivables management, In the earlier unit, we have studied how firms dete...

In the earlier unit, we have studied how firms determine their requirements for current assets and manage their holdings in cash and marketable securities. Inside a classical manuf

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd