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Capacity Management
Capacity has a cost, whether it is used or not
Capacity
Capacity is the maximum output or producing ability of a machine, person, factory, etc.
Capacity can be measured in physical terms Measure of the amount of work done Capacity is the measure of the maximum amount of work that can be done in a given time Capacity = R * T R is the rate of output per unit of time T is the maximum amount of time available
Capacity has a cost Cost to acquire or rent the facility, machine, operating costs, wages, utilities, insurance, etc. The cost is incurred even if capacity is underused
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Normal
Budget
Actual
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A stamping machine costs Rs400,000 per year to operate. The machine can produce 200 stampings per hour. The machine runs 24 hours per day. The company does not work on weekends (104 days) or holidays (10 days) Downtime for maintenance, setups, etc. averages 15 days per year. The machine is idle because of lack of materials for an average of 5 days per year. The equivalent of 8 days of production is lost each year because of defects produced by the machine. Management expects to produce an average of 1,000,000 stampings per year over the next five years. Planned output for the current year was 1,050,000 stampings. Actual output for the current year was 1,032,000 stampings, requiring 215 days. If successfully negotiated, a new contract with a customer would increase demand for the stampings by 24,000 units per year. 6
* * =
400,000
0.228
* * =
400,000
0.361
1,000,000
400,000
0.400
1,050,000
400,000
0.381
1,032,000
400,000
0.388
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Rated capacity
Capacity that does not result in usable output Downtime for maintenance, setups, lack of materials, etc. Productive time lost due to waste, scrap, rework, etc. Idle capacity
Idle capacity
Capacity that is not available due to policy decisions or market reasons such as holidays, lack of orders, etc
Replace the asset with one having less capacity Lower capacity asset can be more fully utilized
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12
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Better utilization of capacity means better utilization of resources. It is an important consideration for cost determination and cost reduction. It is an important consideration for cost determination and cost reduction. Thus, it is essential to establish the capacity of the plant. Cost Accounting Records Rules under section 209(1)(d) of Companies Act, 1956 and Cost Audit Report Rules, 2001 under section 233B of the said Act specify that comparative statement of installed capacity and actual capacity utilization is to be recorded and furnished in order to assess the operating level.
Objective
The objective of the standard is to prescribe the method of determination of capacity to be applied uniformly and consistently.
The standard is to help the management to identify the bottlenecks, imbalances and idle capacity for effective use of various resources.
Scope
The standard should be followed for capacity determination required to be carried out for any purpose or under provisions of any Act, Rules or Regulations except where capacity determination has been prescribed otherwise.
The standard shall also be followed for maintaining cost records under the Cost Accounting Records Rules or for furnishing information on Capacity Utilization under the Cost Audit Report Rules issued pursuant to Section 209(1)(d) and section 233B of Companies Act,1956 respectively
The standard is applicable for an undertaking, whether existing or new, where there is expansion of more than 5% of the existing capacity due to introduction of new machines or productive resources. Similarly, the standard is also applicable where there is more than 5% reduction of the existing capacity due to disposal or withdrawal or impairment of old machines or productive resources.
Definitions
Licensed Capacity is the production capacity of the plant for which license has been issued by an appropriate authority.
Installed Capacity
is the maximum productive capacity according to the manufacturers specification of machines / equipment. Installed capacity of the unit/plant is determined after taking into account imbalances in different machines/ equipment in the various departments / production cost centers in the unit / plant and number of working shifts.
is the maximum productive capacity of a plant reduced by the predictable and unavoidable factors of interruption pertaining to Practical or internal causes. Achievable Capacity
Definitions (contd.)
Normal Capacity is the production achieved or achievable on an average over a period or season under normal circumstances taking into account the loss of capacity resulting from planned maintenance.
Idle Capacity
is the difference between installed capacity and the actual capacity utilization when actual capacity utilization is less than installed capacity.
Definitions (contd.)
is the difference between installed capacity and the actual capacity utilization when actual capacity utilization is more Excess Capacity than installed capacity.
Utilization
is the difference between practical capacity and normal capacity or actual capacity utilization whichever is higher.
Number of shifts
In case a product passes through different production processes and each process is having different capacity then the process which brings effective or ultimate production shall be considered for deciding installed capacity
Number of shifts
Explanation
In case the same products with different specifications and of different ranges in terms of size, type, variety etc are manufactured, then there is a need to determine equivalence among them in order to determine the capacity.
In case some intermediate products / components etc are also produced, they should be taken into consideration for determining equivalent capacity.
In case some machines are leased out/let out or some machines are taken on lease, resulting decrease / increase in capacity should also be considered.
Example
Calculation