# Capacity Levels
Capacity = A factory's ability to produce with available resources and facilities.
Expressed as:
- Units of output (e.g., 100 cars per day), or
- Production hours (e.g., 2,920 hours per year)
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## Four Types of Capacity
### 1. Maximum / Rated Capacity
- Theoretical maximum — can NEVER be achieved in practice
- Assumes the factory works every single day without any stoppages
- Formula: 365 days × hours per day
- Used as the starting point for calculating Practical Capacity
### 2. Practical Capacity
- Maximum capacity less all normal, unavoidable downtime
- Normal losses include: Sundays, holidays, planned maintenance, cleaning
$$\text{Practical Capacity = Maximum Capacity} - \text{Normal loss of capacity}$$
### 3. Normal Capacity
- Average capacity utilisation over one full business cycle (3–5 years)
- Exclude the highest AND lowest years (abnormal years)
- Take average of the remaining years
- Used as the basis for fixed overhead absorption rates in standard costing
### 4. Actual Capacity
- Capacity actually utilised in a given period
$$\text{Idle Capacity = Practical Capacity} - \text{Actual Capacity}$$
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## Hierarchy
```
Maximum Capacity
− Normal downtime (Sundays, holidays, maintenance)
= Practical Capacity
Averaged over business cycle (drop highest & lowest)
= Normal Capacity
Actual production recorded
= Actual Capacity
```
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## Idle Capacity Cost (ICC)
When idle capacity arises from abnormal reasons (power failure, labour shortage, raw material shortage):
$$\text{ICC} = \text{Total Fixed OH} \times \frac{\text{Idle Capacity Hours}}{\text{Practical Capacity Hours}}$$
| Cause of Idle Capacity | Treatment of ICC |
|---|---|
| Unavoidable (repairs, maintenance) | Spread over capacity utilised via Supplementary OH Rate |
| Abnormal (power failure, strikes) | Charge to Costing P&L Account |
| Seasonal factors | Inflate OH rates for production |