CMA Final · Cost and Management Audit · Overview of Cost Accounting Standards and GACAP
For a plant, CAS 2 (Capacity Determination) requires the normal capacity to be determined with reference to which of the following?
Normal capacity under CAS 2 is the average utilisation expected over several years, typically three to five, under normal conditions and after allowing for planned maintenance. It is not the licensed installed capacity, the single best year, or just the current year's output, because those do not reflect normal operating levels.
- AAverage capacity utilisation over a period of three to five years, taking normal maintenance and holidays into accountCorrect
- BInstalled capacity as stated in the licence, ignoring actual utilisation
- CThe highest capacity utilisation achieved in any single year
- DActual production of the current year only
Explanation
CAS 2 defines normal capacity as the production achievable on average over a period of years (generally three to five) under normal circumstances, allowing for planned maintenance. Installed capacity is a separate measure, and the peak or current-year output does not represent normal conditions. Using licence capacity would wrongly inflate the base and understate unabsorbed overheads.
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