capacity management.ppt

8/14/2019 Capacity Management.ppt

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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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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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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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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

capacity management.ppt

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