Types of Capacity

The capacity of a work centre, a machine or equipment can be defined as the amount of work done by that particular item. The capacity of a particular item can be measured in three different ways. The first one is called the production capacity of the unit that means the amount of work the work unit needs to process in order to complete all the production work of the given schedule. The second way of measuring capacity is the protective capacity that means a safety layer provided additional to the production capacity that will be used when some additional units will be required to keep the bottle neck operations from running out of the production work. The remaining capacity of the work centre or unit that is not being used to produce anything is called as the idle capacity of the work centre.

If at some point the management want to reduce the production capacity of the work centre it will reduce the protective capacity of the work centre as a result the bottle neck operations won’t have enough material inputs as a result the production capacity of the work centre will reduce. This will result in the decline of the throughput of the entire manufacturing unit that is related to the bottle neck operations as a result will reduce the overall profitability of the company. Thus before taking a decision of reducing capacity the management should decided which capacity should be lowered that will not have a negative effect on the profitability of the company.

Other Related Accounting Articles:

• Incremental Cash Flow Analysis
• Paid In Capital
• Joint Product Cost Analysis for Managerial Decisions and Profitability Analysis
• Financial Gearing
• Financial Leverage
• Contribution Margin per Unit
• Sampling Error
• Activity Based Management
• Managerial (Management) Accounting Definition
• Least Cost Decisions