Practical vs. Theoretical Capacity
Jun 24, 2015
At one of our recent seminars, a participant asked about theoretical and practical capacity and their uses. You may have heard these terms if you work in any kind of manufacturing environment. To start, we should probably understand what each one means. Practical capacityis a manufacturer’s level of output (often expressed in machine hours, barrels, pounds, etc.) which is less than its theoretical or ideal capacity. In order to better understand this definition, you must recognize the significance of theoretical capacity.
Theoretical capacity is the level of a manufacturer’s production that would be attained if all of its equipment and operations performed continuously at their optimum efficiency. Theoretical capacity is also referred to as ideal capacity.
In summary, practical capacity is the most realistic to occur based on the machines, people, and space. Theoretical capacity the perfect world scenario with everything being fully utilized. Obviously, theoretical capacity is virtually unobtainable.
There are different occasions when each would be appropriate to apply. However, like most costing principles, you cannot always use one or the other. Circumstances can vary and most often “it depends”.
When you are determining a make vs. buy calculation and want to know if you can replace lost capacity if you decide to buy a product, you may view your options in multiple ways. One way could be with practical capacity. Do you have the capability to replace the lost work, and is it realistic. If you are above full practical capacity already can you maintain that? You can also think about theoretical capacity, but cannot assume that is realistic. Things will never be perfect, so planning based on perfection is not a good idea.
In a nutshell, practical capacity is realistic, but do not get stuck in a rut and think you cannot improve upon what you currently are doing. Often times you can aim towards a more theoretical capacity. What are some of the ways you use and consider theoretical and practical capacity?
Categories: Cost Accounting