Divit Electronics manufactures three types of home appliances. The management notes that the plant has an installed capacity of 50,000 units per…

1. Identification of Capacities Capacity Type Definition Units (per product) Installed (Rated or Theoretical) Capacity It refers to the maximum capacity of producing goods or providing services. 50,000 units Practical (Operating) Capacity It is defined as actually utilised capacity of a plant after considering planned losses such as preventive maintenance, setup times, holidays, and training. 45,000 units Normal Capacity Normal capacity is the volume of production or services achieved or achievable on an average over a period under normal circumstances taking into account the reduction in capacity resulting from planned maintenance. 42,000 units Actual Capacity It is the Capacity actually achieved during a given period 40,500 units 2. Role of Practical Capacity in Overhead Absorption It reflects the available productive capacity after accounting for planned downtime, allowing management to allocate overhead costs fairly and accurately to products.Using practical capacity avoids over- or under-absorbing overheads that would occur if installed capacity (theoretical maximum) or actual capacity were used.