COST ACCOUNTING STANDARD ON CAPACITY DETERMINATION

[Mr. M. GOVINDARAJAN]

Need for capacity determination

The capacity details are required by internal management for planning, scheduling of production and monitoring during implementation of the planned program.  Monitoring leads to corrective actions to avoid any probable loss of production. Better utilization of capacity means better utilization of resources, as entities commit resources based on planned capacity utilization.  Moreover, overhead accounting requires determination of normal capacity, to be used in the denominator in establishing overhead absorption rates. 

The Institute of Cost Accountants of India issued Cost Accounting Standards during 2002.  The same was revised the same during 2012.  The Cost Accounting Standard – 2,  2015 replaced the Cost Accounting Standard – 2 -2012.  The revised standard came into effect from 01.04.2024 for the preparation and certification of General Purpose of Cost Accounting Statement.

This method is used for the determining the capacity of a facility for producing goods or providing services by an entity for the ascertainment of the cost of product or service.  This Standard deals with the presentation and disclosure in the cost statements.

Objective

The objective of this Standard is to bring uniformity and consistency in the principles and methods of determination of capacity with reasonable accuracy.

Scope

This Standard shall be applied-

• to the cost statements including those require attestation, which require determination of capacity for assignment of overheads;
• for determination of capacity for any other purpose.

Capacity

The Standard defines various types of capacity such as practical capacity, actual capacity utilization, bottleneck, excess capacity utilization, idle capacity, installed capacity, licenced capacity, normal capacity.

Practical or achievable capacity is the installed capacity minus the inevitable interruptions due to time lost for preventive maintenance, repairs, set ups, normal delays, holidays and weekly off days.  This capacity does not consider the external factors such as lack of orders etc.

Actual capacity utilization is the volume of production achieved  service provided in a specified period.  It is usually expressed as a percentage of installed capacity.  Volume may be measured in terms of units produced or services provided  or equivalent machine or man hours as applicable.

Bottleneck refers to an obstruction that hinders or restricts the flow of workflow processes, thereby constraining capacity of production / rendering of services within a business.

Excess capacity utilization is the difference between the installed capacity and the actual capacity utilization.  It is more than the installed capacity.

Installed capacity is the maximum capacity of producing goods or providing services.  This capacity is determined according to the specifications of the manufacturers or determined through an expert study.

Licensed capacity is the capacity of producing the goods or providing the services for which licence has been issued by an appropriate authority.

Normal capacity is the capacity achieved or achievable for goods or services on an average over a number of periods or seasons under normal circumstances.

Determination of capacity

The capacity is determined in terms of units of production or services or equivalent machine hours or man hours.

• Installed capacity is determined based on-

• Technical specifications;
• Technical evaluation;
• Capacities of individual or interrelated production or operation centers;
• Operational constraints or capacity of critical machines or equipment;
• Number of shifts or machine hours or man hours.

If the Government orders for capacity determination it shall be in accordance with the directions of the Government.  If technical specifications are not available for the determination of capacity, the estimates by technical experts on capacity under ideal conditions shall be considered for determination of installed capacity.

• Reassessment of installed capacity – The installed capacity shall be reassessed in case of any change due to addition, deletion, modification or for any other reason from the date of such change.  If reassessment is done as per the Government or regulator, the re-assessment shall be done according to the directions of the Government or regulator.
• Normal capacity is determined after making suitable adjustments to the installed capacity.  The following adjustments may be made-

• Time lost due to scheduled preventive or planned maintenance;
• Number of shifts or machines hours or man hours;
• Holidays, normal, shut down days, normal ideal time;
• Normal time loss in batch change over.

Presentation

The Cost Statements shall present-

• Installed capacity;
• Normal capacity;
• Actual production of goods or services provided

in absolute terms.  Actual capacity utilization shall be presented as a percentage of installed capacity.

Disclosures

The Cost Statements shall disclose the following-

• Basis for arriving at different types of capacity;
• Changes in the installed capacity or normal capacity with reason thereof;
• Capacity enhanced through outsourcing;
• Capacity outsourced to others;
• Details of actual production of goods or services provided-

• Self-manufactured goods or services provided through in-house facility;
• Goods produced or services provided through outsourcing;

• Reasons for low-capacity utilization;
• Abnormal cost for under-utilization of capacity.

Disclosures shall be made only when the materials are significant and quantifiable.  The disclosures shall be made in the body of the Cost Statement or as a separate foot note or in a separate schedule.