Production Capacity, Constraints and Relevant Range in Manufacturing

This report examines the concept of production capacity within a manufacturing environment, differentiating between theoretical and practical capacities. Theoretical capacity represents the maximum output under ideal conditions, while practical capacity considers real-world constraints like machine downtime, quality requirements, and scheduling issues. The report explores various factors that limit productive capacity, including employee absences, equipment failures, and power disruptions. Furthermore, it addresses the ‘relevant range’ concept in management accounting, highlighting how it helps in understanding fixed costs within a specific activity level. This report provides a comprehensive overview of capacity planning and its implications in manufacturing, supported by relevant references.

Question
Discuss the notion of production capacity in a manufacturing environment. Your answer should
discuss the different meanings of theoretical and practical capacity as they are applied in
manufacturing firms.
Describe some of the constraints which may impact on the productive capacity of a manufacturing
company. In your answer address the ‘relevant range’ concept as it is applied in management
accounting.
Solution
Production capacity in the manufacturing environment means the total volume of the products that
can be generated by the plant or enterprise within the given time period and using the available set
of resources. Ideally, capacity is something which is difficult to quantify.
In practical scenario, the capacity is used to refer to the maximum output that can be produced
when the demand is high and assuming that the same level of production can be done on a daily
basis. Whereas theoretical capacity assumes that nothing is wrong with the production set up any
time and it is working at full efficiency all the time. Thus, practical capacity will always be lower
than the theoretical capacity (Alexander, 2016).
There are various constraints which are considered in case of calculating the practical capacity, some
of which are quality requirements, scheduling programs, the machine maintenance time and
production mix or composition. There can be several other constraints like employee vacations and
holidays, strike and lock outs, machine breakdown, power failure, etc. Thus it can be said that the
concept of theoretical capacity is notional and cannot be achieved in reality on consistent basis.
Relevant range refers to the specific activity level which have the maximum and minimum amount.
Within this range, certain expenses and revenues can be expected occur but in case the relevant
range is breached, the revenues as well as the expenses may differ from the expectations (Erik & Jan,
2017). With respect to capacity planning, relevant range concept is being used to determine that the
fixed cost that is bound to occur within the given reasonable range of the activity.
References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4),
411-431.
Erik, H., & Jan, B. (2017). Supply chain management and activity-based costing: Current status and
directions for the future. International Journal of Physical Distribution & Logistics
Management, 47(8), 712-735.