Financial Management: Cost Behavior and Production Capacity Analysis

This essay provides an overview of cost behavior within the context of financial management, emphasizing its relationship with production capacity. It defines production capacity in a manufacturing environment as the maximum possible output, influenced by factors like labor, land, and infrastructure. The document distinguishes between design capacity, effective capacity, and actual output, noting that insufficient capacity can lead to poor performance and customer dissatisfaction. It also addresses the constraints on productive capacity, such as bottlenecks and limited capital, and highlights the importance of decision-making to maximize profits under these constraints. The analysis stresses that production capacity operates within a relevant range, and the representation of this range is expressed in terms of production brackets where fixed costs remain constant. The essay concludes by referencing relevant literature on enterprise risk management and manufacturing systems engineering.

Running Head: FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT
Name of the Student
Name of the University
Author Note

1FINANCIAL MANAGEMENT
Table of Contents
Cost Behavior.............................................................................................................................2
Reference....................................................................................................................................3

2FINANCIAL MANAGEMENT
Cost Behavior
Production capacity in the manufacturing environment is defined as the maximum
possible output in the economy. It is defined as the ability for deploying the capacity if the
product which is based on the demands for the goods by using the current resources that
includes factors such as labor, land, infrastructure, facilities and machines. The capacity of
production is referred by using three definitions of the capacity. First is, design capacity,
which means that the maximum possible output that can be achieved, second is, the effective
capacity that means the maximum possible output under the given constraint such as product
mix consumption, requirement of quality, scheduling problems and machine maintenance.
Last is, actual output, which is defined as the rate of the output, which is actually attained that
is typically less than effective output that caused by the breakdown of machine. Insufficient
capacity will lead towards poor performance, frustration of the manufacturing personnel and
increase work in progress that affects reduction in the productivity prospects and customer
dissatisfaction (Hitomi, 2017).
The constraint of the productive capacity is the factor, which prevents the
manufacturing company for achieving the more output that includes minor bottlenecks,
capital that is constrained, resources and design. Hence, decisions are required for finding out
the objectives that maximize profits that is subject to constraints. The production capacity
operates within the relevant range. However, there is no equipment and machinery, which can
operate above relevant ranges for very long. In the analysis of the cost behavior
representation of the relevant range is expressed in terms of production bracket in terms of
the unit in which the fixed costs are fixed indeed (Bromiley et al. 2015).

3FINANCIAL MANAGEMENT
Reference
Bromiley, P., McShane, M., Nair, A., & Rustambekov, E. (2015). Enterprise risk
management: Review, critique, and research directions. Long range planning, 48(4),
265-276.
Hitomi, K. (2017). Manufacturing systems engineering: A unified approach to manufacturing
technology, production management and industrial economics. Routledge.