Cost of unused capacity
Cost of unused capacity is the fixed cost of capacity a business paid for but did not use, found by multiplying unused capacity by the fixed cost per unit of capacity. It separates resources supplied from resources actually consumed.
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A factory's practical capacity is 10,000 machine hours, with budgeted fixed overhead of €150,000, giving a fixed cost per hour of €15. Running only 8,200 hours this month leaves 1,800 hours unused, costing 1,800 × €15, or €27,000 — capacity the factory paid for but never actually used.
Where it fits
SubjectCost AccountingAdvancedTopicAbsorption & Variable CostingAdvancedTopicOverhead Allocation & ABCAdvanced
The formula
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Variables
- Cost of unused capacity (€)
- Practical capacity (units or hours)
- Actual capacity used (units or hours)
- Fixed cost per unit of capacity (€)
Values the fixed cost of the capacity that was paid for but not used in the period.