What is Activity Capacity?

Activity capacity is the rate of output of an activity over a protracted period of time, assuming the existence of normal operating conditions. Normal conditions involve a reasonable amount of down-time for employee breaks, maintenance, shift changes, and so forth. Activity capacity is incorporated into the budgeting process for the production area, to determine the amount of goods that the process can actually generate. This analysis can be used in the following ways:

Capacity changes. Activity analysis can result in a decision to invest in more manufacturing equipment in order to increase the amount of capacity. Activity capacity analysis is especially important when the activity in question is the bottleneck operation, since this controls the overall throughput of the operation. In rare cases, it can also result in a deliberate reduction in the capacity level, by dismantling and selling off operations.
Sales planning. If there is no plan to increase activity capacity levels, then a business will need to sequence its sales and marketing activities to ensure that the existing capacity level can always meet planned sales.