Definition: Master budget capacity utilization is the amount of production management can assume during a period when making the master budget.
What Does Master Budget Capacity Utilization Mean?
What is the definition of master budget capacity utilization? MBCU is key to help predict company costs that will be incurred in the future year to meet customer demand. Cost accountants and management use this to help predict the costs that are driven by customer demand because they do not want to have an over or under supply of their product/service, which would lead to unnecessary costs. Master budget capacity utilization takes into consideration the current economy and seasonal demand which helps managers make short term cost decisions or budgets.
Here is an example.
Bob is the manager of Splish Splash, a high end infant bath tub manufacturing company based. Bob is creating the budget for the following year and needs to know how many machines he needs to produce bath tubs for the year. The average number of infant baths that were produced last year was 20,000 tubs over the course of 1 year. Bob predicts that the growing economy and rise in pregnancies will increase sales 10%, which will yield the predicted demand of 22,000 infant bath tubs. Each machine is able to produce 4,400 tubs so Bob would need to set a capacity of 5 machines to meet the predicted demand for the year.
Master budget capacity utilization is important in this situation because if Bob used the sales from the previous year, he would not be able to meet the demand for the infant tub because he would have set the machine capacity too low, which would result in a huge loss of business.
Define MBCU: Master budget capacity utilization means the expected volume of production a manager predicts over the term of a budgetary period, which is usually one year.