CAS - 2 Capacity Determination

COST ACCOUNTING STANDARD ON CAPACITY DETERMINATION
The following is the draft COST ACCOUNTING STANDARD 2 (CAS 2) issued by the Cost Accounting Standard Board of the Institute of Cost and Works Accountants of India on “CAPACITY DETERMINATION”. The standard deals with determination of capacity of a unit. In this Standard, the standard portions have been set in bold italic type. These shouldshall be read in the context of the background material which has been set in normal type. (OK)
1. Introduction
Better utilization of capacity means better utilization of resources. It is an important consideration for cost determination and cost reduction. Thus, it is essential to establish the capacity of the plant. Cost Accounting Records Rules under section 209(1)(d) of Companies Act, 1956 and Cost Audit Report Rules, 2001 under section 233B of the said Act specify that comparative statement of installed capacity and actual capacity utilization is to be recorded and furnished in order to assess the operating level.
2. Objective
2.1 The objective of the standard is to prescribe the method of determination of capacity to be applied uniformly and consistently.
2.2 The standard will help the management to identify the bottlenecks, imbalances and idle capacity for effective use of various resources.
2.3 The standard will help in proper allocation, apportionment and absorption of cost.
3. Scope
3.1 The standard will be followed for capacity determination required to be carried out for any purpose or under any provisions of any Act, Rules or Regulation.(OK)
3.2 The standard will also be followed for maintaining the cost records under the Cost Accounting Records Rules or for furnishing information on Capacity Utilization under the Cost Audit Report Rules issued pursuant to Section 209(1)(d) and section 233B of Companies Act,1956, respectively.(OK)
3.3 The standard will be applied for an undertaking, whether existing or new, where there is substantial expansion in capacity due to introduction of new machines, productive resources or reduction in capacity due to disposal or withdrawal or impairment of old machines or productive resources. ( No change to be made)
4. Definitions
4.1 ‘Licenced Capacity’ is the production capacity of the plant for which licence has been issued by an appropriate authority.
4.2 ‘Installed Capacity’ is the maximum productive capacity according to the manufacturers’ specification of machines / equipment. Installed capacity of the unit/plant is determined after taking into account imbalances in different machines/ equipment in the various departments / production cost centres in the unit / plant and number of working shifts.
4.3 ‘Practical or Achievable Capacity’ is the maximum productive capacity of a plant reduced by the predictable and unavoidable factors of interruption pertaining to internal causes.
Thus, practical capacity is the installed capacity minus the inevitable interruptions due to time lost for break downs of machines, repairs, set ups, normal delays, weekly off-days and holidays, inventory taking periods etc. Practical capacity does not consider the external factors causing reduction in production e.g. lack of orders. (OK)
4.4 ‘Normal Capacity’ is the level of productive capacity i.e. attained or attainable over a period of time, considering the normal conditions and variations in the of business. (OK)
Normal capacity is practical capacity minus the loss of productive capacity due to external factors.
4.5 ‘Actual Capacity Utilization’ is the volume of production achieved in relation to installed capacity.
4.6 ‘Idle Capacity / underutilisation of Capacity’ is the difference between installed capacity and the actual capacity utilization when actual capacity utilization is less than installed capacity ( No change required , matter is deliberated in details earlier).
4.7 ‘Excess Capacity Utilization of Capacity’ is the difference between installed capacity and the actual capacity utilization when actual capacity utilization is more than installed capacity (( No change required , matter is deliberated in details earlier)..
4.84.1‘Under utilization of Capacity’ is the difference between practical capacity and the actual capacity utilization ( should be retained as it is).
(Covered in para 4.6)
4.8 Abnormal Idle Capacity is the difference between practical capacity and normal capacity (or actual capacity, whichever is higher).
4.9 Unutilised capcity is the difference between Installed capacity and Normal capacity
5. Determination of Installed Capacity
5.1 Installed capacity is determined based on :
Comment : Heading to be redrafted as under
5.1 Installed Capacity is determined considering factors such as :
i) Manufacturers’ Technical specifications
ii)i)Capacities of individual or interrelated production centres.
iii)i)Operational constraints / capacity of critical machines
iv)ii) Number of shifts
v)iii) Any other factors in line with above
5.2 In case of (OK) manufacturers’ technical specifications are not available, the estimates by technical experts on capacity ( No change) under ideal conditions may be considered for determination of installed capacity .
5.3 In case a product passes through different production processes centres and capacity of individual cost centre finally determines the ultimate production of the product, then the installed capacity for the product will be equal to the minimum of capacities of different cost centres. and each process is having different capacity than the process which brings out effective / ultimate production, will be considered for deciding installed capacity.
5.3In case a product passes through different Production Cost Centers / Production Processes with different capaciies then the installed capacity for the product will be equal to the minimum of capacities of different Production Cost Centers / Production Processes.
5.4 In case some of the machines are taken on lease or are given on lease, their capcities should be adjusted to Installed capacity to arrive at `Avaialable Capacity’.
6. Determination of Practical / Achievable Capacity
6.1 Practical capacity or achievable capacity should shall be determined after adjustment of the following with in the installed capacity.
(i) Available production hours taking into consideration holidays, normal shut down days and normal idle time.
(ii) Normal time loss in batch change over, break down of machines, repairs, inventory taking periods etc
(iii) Loss in Eefficiency due to ageing of the machines/ equipment
(iv) Number of shifts
(v) Any other factors in line with above
6.2 `Off Loading’ or `Outsourcing’ of certain components / processes should be considered for determining practical capacity.
Comment : Above para should be added.
7. Determination of Normal Capacity
7.1 Normal capacity is determined based on the productive capacity achieved or expected to be achieved over a period of time , say three to five years. This capacity is determined after adjustment of external factors with in practical capacity.
7.27.1In case of new plant where at the initial stage the capacity will be far below the normal capacity, normal capacity may be taken as one based on specific industry’s standard, market projection etc. The period to achieve normal capacity may depend on infrastructural support, management decision, market condition etc.
7.2 In case of new plant where at the initial stage the capacity utilisation may be below the normal capacity, normal capacity may be taken as one based on specific industry’s standard, market projection etc. The period to achieve normal capacity may depend on infrastructural support, management decision, market condition etc.
7.3 Normal capacity of cost centres involved in the production of a product or the productive capacity of the plant as a whole shouldshall be taken into account to arrive at normal capacity for a product or plant, as the case may be .
7.4 The periods influenced by abnormalities shouldshall be excluded for this purpose.

Note :
1. In case the same products with different specifications and of different ranges in terms of size, type, variety etc are manufactured, then there is a need to determine equivalence among them in order to determine the capacity.
2. In case some intermediate products / components etc are also produced, they should shall be taken into consideration for determining equivalent capacity.
3. In case some job is outsourced or some machines are given on lease, its impact in terms of increase / decrease in capacity shouldshall be considered separately.
8. Disclosure and Presentation
8.1 The details of basis for arriving at the capacity, variables parameters used and assumptions made should shall be disclosed
8.2 Any change in the installed capacity due to modifications in the machines/ equipment or addition of balancing equipment or disposal or impairment of some machines/ equipment should shall be disclosed.
8.3 The licenced capacity and installed capacity should shall be disclosed in absolute term of production units (Comment:- Word unit seems to be more appropriate and needs to be added)capacity whereas practical capacity, normal capacity and actual capacity utilization during a particular period should shall be properly disclosed in absolute term or in as well as percentage of installed capacity.no change is required)(
8.4 In case the same products with different specifications and of different ranges in terms of size, type, variety etc are manufactured, then there is a need to determine equivalence among them and capacity shouldshall be established in terms of equivalent units.(OK)
8.5 In case some job is outsourced or some machines are given on lease, its impact in terms of increase/ decrease in capacity should shall be disclosed separately. (Not Clear) (Ok) ( Para 4, item 2 of CARR also speaks of capacity enhanced during the year by leasing arrangement , hence it should be retained as it is).
8.6 In case of low capacity utilization as compared to the installed capacity, reasons for the same should shall be disclosed. Comments on the shortfall in production should shall also specify the factors which are controllable analysed into controllable in short term or in long term (OK).
8.7 In case of excess capacity utilization, the same should shall be disclosed separately in absolute terms or in terms of percentage, with reasons .