Theoretical and practical capacity
In one sentenceTheoretical capacity is the highest possible output without any stoppage, and practical capacity is what can actually be produced after normal stoppages such as maintenance and holidays.
Simply put
Theoretical capacity is notional and almost never achieved, because it assumes continuous work with no breakdowns. Practical capacity is closer to reality.
The capacity you choose to divide fixed costs by changes the unit cost, and practical capacity is the most commonly used basis.
Worked example
A factory has a theoretical capacity of 10,000 units a year, a practical capacity of 8,500 units, and fixed indirect costs of 170,000 SAR.
Rate at theoretical capacity170,000 ÷ 10,000 = 17 SAR per unit
Rate at practical capacity170,000 ÷ 8,500 = 20 SAR per unit
Absorption rate adopted (practical capacity)20 SAR per unit
Don't confuse it with
Idle capacity costPractical capacity is what you can produce, and idle capacity cost is the price of the part of it you did not use.