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Capacity Management
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Capacity has a cost, whether it is used or not
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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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Traditional measures do not reflect the cost of capacityusage or over capacity
Costs are part of overhead and allocated to production
- Focus is on inventory valuation, not managingcapacity
- Allocation base is chosen from five alternatives
-TheoreticalMaximum output when operating continuously at
maximum efficiency
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MEASURING THE COST OF CAPACITY
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MEASURING THE COST OF CAPACITY
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Practical
Level of output under current conditions, allowing for normal
downtime for setups, maintenance, vacations, etc.
Normal Average level of output achieved or anticipated over several years
Budget Level of output anticipated for the current year
Actual Level of output actually achieved in the current year
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Measuring the Cost of Capacity
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Traditional cost allocation measures
Output
Operating
Cost (Rs)
Cost per
Unit(Rs)Theoretical capacity
Units per hour 200
Hours per day * 24
Days per year * 365Theoretical capacity = 1,752,000 400,000 0.228
Practical capacity
Units per hour 200
Hours per day * 24
Operating days per year* * 231Practical capacity = 1,108,800 400,000 0.361
* 365-104-10-15-5=231 days
Normal capacity
Expected 5 year average output 1,000,000 400,000 0.400
Budget capacity
Planned output for the current year 1,050,000 400,000 0.381
Actual capacity
Actual output for the current year 1,032,000 400,000 0.388
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MEASURING THE COST OF CAPACITY
CAM-I capacity model focuses on the cost of used and unused capacity
Capacity is divided into four categories
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Same as theoretical capacityRated capacity
Capacity used to produce usable outputProductive
capacity
Capacity that does not result in usable output
Downtime for maintenance, setups, lack ofmaterials, etc.
Productive time lost due to waste, scrap, rework,etc.
Idle capacity
Nonproductivecapacity
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MEASURING THE COST OF CAPACITY
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Capacity that is not available dueto policy decisions or marketreasons such as holidays, lack oforders, etc
Idlecapacity
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Measuring the Cost of Capacity
Cost is attached to the capacity categories based on the theoretical cost
per unit
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Cost per
Capacity category Unit(Rs)
Rated 365 1,752,000 0.228 400,000
Productive 215 1,032,000 0.228 235,616
Nonproductive
Setups 15 72,000 0.228 16,438
Standby 5 24,000 0.228 5,479
Defects 8 38,400 0.228 8,767
Subtotal 28 134,400 0.228 30,685
Idle
Weekends, holidays114 547,200 0.228 124,932
Marketable 5 24,000 0.228 5,479
Not marketable 3 14,400 0.228 3,288
Subtotal 122 585,600 0.228 133,699
Total 365 1,752,000 0.228 400,000
Output
Days (4,800 units per day) Capacity cost(Rs)
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Managing Capacity Costs
Capacity costs may be fixed, but can still be managed
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Increasing sales to use unused capacity
Renting unused capacity to others
Reduction in days offReduction of idle
capacity
Reduction of setup time, defects, etc.Reduction of
nonproductivecapacity
Replace the asset with one having lesscapacity
Lower capacity asset can be more fully
utilized
Reduction of ratedcapacity
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IMPLICATIONS OF THE CAM-I MODEL
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Illustrates the reasons for idle andnonproductive capacity
Illustrates the cost of idle andnonproductive capacity
Helps management prioritizecapacity utilization efforts
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PRACTICAL CONSIDERATIONS IN
MEASURING CAPACITY
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How is capacitydefined?
Worker,
machine,factory, etc.
Higher-levelcapacity(process,
factory, etc.) isdetermined bythe lowestcapacitycomponent
Capacity maychange over time
Assets slowing
with age Technological
improvementsto assets
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Cost Accounting Standard On
Capacity Determination Cost Accounting Standard 2 (cas 2) issued by the Council of the
Institute of Cost and Works Accountants of India on CAPACITYDETERMINATION.
The standard deals with determination of Capacity of a unit.
Better utilization of capacity means better utilization of resources. It isan important consideration for cost determination and cost reduction. Itis an important consideration for cost determination and cost reduction.
Thus, it is essential to establish the capacity of the plant. CostAccounting Records Rules under section 209(1)(d) of Companies Act,1956 and Cost Audit Report Rules, 2001 under section 233B of the saidAct specify that comparative statement of installed capacity and actualcapacity utilization is to be recorded and furnished in order to assess the
operating level.
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Objective
The objective of the standard is to prescribe the method ofdetermination 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.
The standard is to help in proper allocation, apportionment andabsorption of cost.
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Scope
The standard should be followed for capacity determination required to becarried out for any purpose or under provisions of any Act, Rules orRegulations except where capacity determination has been prescribedotherwise.
The standard shall also be followed for maintaining cost records under theCost Accounting Records Rules or for furnishing information on CapacityUtilization under the Cost Audit Report Rules issued pursuant to Section209(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 tointroduction of new machines or productive resources. Similarly, thestandard is also applicable where there is more than 5% reduction of theexisting capacity due to disposal or withdrawal or impairment of oldmachines or productive resources.
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Definitions
LicensedCapacity
is the production capacity of the plant for which license has been
issued by an appropriate authority.
InstalledCapacity
is the maximum productive capacity according to the
manufacturers specification of machines / equipment. Installedcapacity of the unit/plant is determined after taking into accountimbalances in different machines/ equipment in the variousdepartments / production cost centers in the unit / plant and numberof working shifts.
Practical orAchievableCapacity
is the maximum productive capacity of a plant reduced by thepredictable and unavoidable factors of interruption pertaining tointernal causes.
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Definitions (contd.)NormalCapacity
is the production achieved or achievable on an average over aperiod or season under normal circumstances taking into accountthe loss of capacity resulting from planned maintenance.
ActualCapacity
Utilization
is the volume of production achieved in relation to installedcapacity.
IdleCapacity
is the difference between installed capacity and the actual capacityutilization when actual capacity utilization is less than installedcapacity.
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Definitions (contd.)
Excess CapacityUtilization
is the difference between installed capacity and the actualcapacity utilization when actual capacity utilization is morethan installed capacity.
Abnormal idlecapacity
is the difference between practical capacity and normal
capacity or actual capacity utilization whichever is higher.
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Determination of Installed CapacityInstalled capacity is determined based on :
ManufacturersTechnical
specifications
Capacities ofindividual orinterrelatedproduction
centres.
Operationalconstraints /capacity of
criticalmachines
Number ofshifts
Any otherfactor
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Determination of Installed Capacity (contd.)
In case of manufacturers technical specifications are notavailable, the estimates by technical experts on capacity underideal conditions may be considered for determination of installedcapacity.
In case a product passes through different production processesand each process is having different capacity then the processwhich brings effective or ultimate production shall be considered
for deciding installed capacity
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Determination of Practical/AchievableCapacity
Practical capacity or achievable capacity shouldbe determined after adjustment of the following
with the installed capacity.
Availableproductionhours taking
intoconsideration
holidays,normal shutdown days and
normal idletime.
Normal timeloss in batchchange over,
break downs ofmachines,repairs etc
Loss inefficiency dueto ageing of
the machines/equipment
Number of
shifts
Any other
factor
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Determination of Normal Capacity
Normal capacity is determined based on the productive capacityachieved over a period of time, say average of three normal years outof preceding five years or expected to be achieved over a period oftime, say next three to five years .
This capacity is determined after adjustment of external factors with
practical capacity.
Normal capacity of production process involved in the production ofa product or the productive capacity of the plant as a whole should betaken into account to arrive at normal capacity for a product or plant,
as the case may be
The periods influenced by abnormalities should be excluded for thispurpose.
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Explanation
In case the same products with different specifications and of
different ranges in terms of size, type, variety etc aremanufactured, then there is a need to determine equivalenceamong them in order to determine the capacity.
In case some intermediate products / components etc are alsoproduced, they should be taken into consideration for determiningequivalent capacity.
In case some machines are leased out/let out or some machines aretaken on lease, resulting decrease / increase in capacity shouldalso be considered.
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Example
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Calculation