Normal capacity

1. General rule

• The “normal capacity” is the total number of machine hours in a year decreased by the number of hours lost because of technical constraints and for which recipe production time doesn’t include any allowance.
• It corresponds to the total time (365 days x 24h) without causes (T2) and (T3) if (T3) has not been taken into consideration in product recipes.
  It should be based on OEE (Overall Equipment Efficiency) model. 
  Note that it is possible to include (T3) in the recipes’ production time. In that case, these times are also included in the “normal capacity”.

• • T1: External causes stoppages: lack of sales, lack of supplies due to suppliers or carriers' failures (material and energy), force majeure, general strike (i.e. not specific to the site like national strike).
  • T2: Planned Maintenance and annual shutdowns
  • T3: Intercampaign changeovers
  • T4: Breakdowns
  • T5: Process / Operations: low speed / cycle time not respected, lack of supplies due to internal failures (missing orders, wrong planning…), local strike (i.e. specific to the site or to the workshop)
  • T6: Quality: scrap, and non-sellable without rework or recycling product
• The “normal capacity” has to be calculated with OEE data of the last twelve months
  • excluding the non-recurring events
  • except planned maintenance (T2), that must be based on forecast for the next year. 

2. Other constraints:

The normal capacity can be decreased by other constraints such as legal constraints or production bottleneck.

A production bottleneck is a stage in a process that causes the entire process to slow down or stop.

3. Definition of unit standard fixed costs - general rule

The standard unit fixed cost is a production time multiplied by an hourly rate:

• The hourly rate is the “standard fixed cost budget” divided by the “normal capacity”
• The production time is the time necessary to produce one unit. It is defined in the recipe of each material.

4. Definition of unit standard fixed costs - sub-products

When a production process results in two products or more:

• The product used for MRP (Material Requirement Planning) is called main product,
• Other products that need valuation are either “recipe-based costing” sub-products, “manual costing” sub-products, off-specification products or marketable wastes.

"Recipe-based costing": Recipe-based costing sub-product absorbs fixed costs because it participated to the justification of:

• The investment, driving the capacity of the installation which manufactured it,
• The plant acquisition, having a positive gross margin in the business plan supporting that acquisition.

"Manual costing": They don’t absorb any fixed costs. Their valuation is based on their net realizable value that is the average net selling price decreased by variable selling expenses.