6 Main Types of Plant Capacity Level | Cost Accounting

The following points highlight the six main types of a plant capacity levels. The types are: 1. Maximum Capacity 2. Practical Operating Capacity 3. Capacity to Make and Sell 4. Actual Capacity 5. Normal Capacity 6. Idle Capacity.

Plant Capacity Level: Type # 1. Maximum Capacity:

This is the cent per cent rated capacity of a plant i.e. maximum possible capacity which may be achieved without interruption and without any loss of operating time. This capacity is never achieved in practice as some losses due to waiting for maintenance and delays are of inevitable nature. It is because of these reasons, this capacity is also termed as Theoretical Capacity.

Plant Capacity Level: Type # 2. Practical Operating Capacity:

If from the maximum capacity, capacity lost due to operating interruptions (inevitable within normal limits) like time lost for all repairs, breakdowns, set ups, waits, delays in supply of materials, labour absenteeism etc., is deducted, the balance is the practical capacity. Thus, this is the maximum capacity of the plant or department to make.

This capacity is taken as the maximum capacity for all practical purposes. On an average total interruptions account for 10% to 15% of the total capacity. External factors causing reduction in production i.e. lack of orders from customers are not considered in this capacity.

Plant Capacity Level: Type # 3. Capacity to Make and Sell:

If the concern is not able to sell the entire quantity produced due to lack of demand, it will not work at full capacity. The capacity based on expected sales is, therefore, the capacity required to meet the demand or sales.

Illustration 1.

PQR Ltd. has its own power plant, which has two users, Cutting Department and Welding Department. When the plans were prepared for the power plant, top management decided that its practical capacity should be 1,50,000 machine hours. Annual budgeted practical capacity fixed costs are Rs.9,00,000 and budgeted variable costs are Rs.4 per machine-hour. Following are available:

Plant Capacity Levels with Illustration 1

Required:

(i) Allocate the power plant’s cost to the cutting and the welding department using a single rate method in which the budgeted rate is calculated using practical capacity and costs are allocated based on actual usage.

(ii) Allocate the power plant’s cost to the cutting and welding departments, using the dual- rate method in which fixed costs are allocated based on practical capacity and variable costs are allocated based on actual usage.

(iii) Allocate the power plant’s cost to the cutting and welding departments using the dual-rate method in which the fixed-cost rate is calculated using practical capacity, but fixed costs are allocated to the cutting and welding department based on actual usage. Variable costs are allocated based on actual usage.

(iv) Comment on your results in requirements (i), (ii) and (iii).

Solution:

SolutionSolution

(iv) Under the dual rate method as in requirement (III), the allocation to each department is same as the allocation achieved using single rate method in requirement (i). The major advantage of this approach is that the user departments are allocated fixed capacity cost only for the capacity used.

The unused capacity cost Rs.3,00,000 (i.e. Rs.9,00,000 – Rs.6,00,000) will not be allocated to the user department. This highlights the cost of unused capacity.

In requirement (ii) fixed cost of capacity are allocated to operating departments on the basis of practical capacity, so all fixed costs are allocated on the basis of practical capacity and there is no unused capacity identified with the Power Plant.

Plant Capacity Level: Type # 4. Actual Capacity:

The volume of production achieved in a specified period is called actual capacity. This capacity may be between the practical capacity level and the capacity based on sales expectancy or even below it.

Plant Capacity Level: Type # 5. Normal Capacity:

There are different opinions regarding the concept of normal capacity of the plant. One view is to take the normal capacity as the long term average of the sales expectancy level. The period is taken as such so that it may cover two or three years according to the period of normal business cycle and seasonal variations.

Some take normal capacity as the operating capacity i.e. capacity which would be worked if there was no lack of orders. Thus, it is the capacity available for utilisation during a normal period. It makes allowances for repairs, maintenance, normal delays and normal idle time but it disregards loss of output due to major breakdowns, abnormal delays or abnormal idle or lost time.

It is an estimated budgeted capacity attainable in a budget period and is based on the rated capacity after taking into account loss of output or capacity normally incurred.

The main objectives of such capacity are fixation of budgets, computation of overhead rate establishment of sales prices, setting up and calculating standard Cost of products, control of cost reduction of costs, basis for scheduling production, valuation of inventory, measurement of effect of changes in volume of production and determination of break-even point.

Physical capacity and average sales expectancy are more important in determination of normal capacity as compared to rated capacity of the plant and the sales potentials. The former should be determined on long terms basis in order to smoothen the cyclic fluctuations. Machinery and equipment purchased for (he future, obsolete and outmoded machinery should be excluded while determining the normal capacity.

Plant Capacity Level: Type # 6. Idle Capacity:

Idle capacity is that part of the capacity of a plant, machine or equipment which cannot be effectively utilized in production. It may arise due to lack of product demand, non­-availability of raw material, shortage of skilled labour, shortage of power etc. Costs associated with idle capacity are mostly fixed in nature and remain unabsorbed or unrecovered due to under-utilisation of plant and service capacity.

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