What is Normal Capacity?

Normal capacity is the amount of production volume that can be reasonably expected over the long term. Normal capacity takes into account the downtime associated with periodic maintenance activities, employee vacations, crewing problems, and so forth. When budgeting for the amount of production that can be attained, normal capacity should be used, rather than the theoretical capacity level, since the probability of attaining normal capacity is quite high. The normal capacity level can decline over time as production equipment ages, since the equipment requires more maintenance effort.

How is Normal Capacity Used?

Normal capacity information can be used in the following ways:

Price formulation. Normal capacity information is used to derive product prices, since it limits the number of units that can be produced.
Performance baseline. Normal capacity is used as a performance baseline, where management compares normal capacity to actual output. For example, the manager of the maintenance department could be judged on how well a production facility can adhere to the normal capacity level through the use of predictive maintenance activities.
Budgeting. Normal capacity is used in budgeting, where the budget’s production costs are based on the normal capacity level of the firm’s production operations.