Practical capacity is a manufacturer's level of output (often expressed in machine hours, barrels, pounds, etc.) that is less than its theoretical or ideal capacity. For example, if a manufacturer has theoretical capacity of 2,080 hours based on 8 hours per day for 5 days per week for 52 weeks, its practical capacity might be only 1,860 hours. The 220 hour difference could be associated with repairs, maintenance, setups, plant shutdowns for holidays, and other downtime. Hence, a manufacturer's practical capacity is more realistic than its theoretical capacity.
However, the manufacturer's annual output to meet its sales orders and production schedules could be considerably less than its practical capacity. As a result, cost accountants will also review 1) the annual machine hours that normally occurs over a span of several years, and 2) the number of machine hours expected in the upcoming year.
In the long run, it is important that manufacturers plan and control their theoretical, practical, normal and next year's budgeted capacity levels.
