Alternative Strategies for Dealing with Idle Capacity in Global Supply Chains

If you have zero idle time this may indicate you suffered Lost Sales due to insufficient Factory Capacity. You should view the Lost Sales figures on the Product Summary or Market Summary reports. Capacity Cost is the cost (mostly fixed), which remain unabsorbed due to under-utilization of capacity. This is a loss to the organisation and such cost should be kept as minimum as possible.

The questions are related to how to value the 1 million
widgets and how to determine the company’s income or loss for the year? Should the idle
capacity costs be charged to the inventory as product costs, expensed, or treated as a
loss? The variable costs are Idle capacity $100,000 for material and labor (1,000,000 @ .10) and the
overhead is $300,000. The owner
(based on the advice of his auditors) wants to value the inventory at 40 cents
per unit. This would leave $160,000 in the ending inventory and show a loss of $30,000.

Reducing cloud spend by detecting and eliminating idle capacity

As the result, they will create bottlenecks and idle time for the next production stages. The capacity usage ratio and the capacity utilisation ratio in respect of a machine for a particular month is 90 and 80 per cent respectively. Under-absorption represents the cost of idle capacity inclusive of the unavoidable interruptions. The action to be taken by the management to obviate the idle capacity depends on the causes leading to it. Some causes such as lack of materials, tools or equipment’s, breakdown of machines in the absence of preventive maintenance etc. can be controlled by the suitable management action.

• Capacity Cost is the cost (mostly fixed), which remain unabsorbed due to under-utilization of capacity.
• StackArmor OpsAlert provides powerful insight into cloud utilization, cost and idle capacity.
• We know that variable overheads vary with the changes in the level of output but fixed costs are not affected by the extent of capacity utilisation.
• The under-absorption indicates the cost of capacity unutilized due to lack of sales provided no other cause as change in level of spending or difference is predetermined and actual overhead rate is attributable to this under-absorption.
• We present an elaborate numerical example
  of a competitive manufacturing industry in the United States facing demand
  fluctuations to illustrate cost of idle capacity in manufacturing.
• Following is the flexible budget of a department of a manufacturing company.
• The idle capacity variance indicates the amount of overhead that is either under – or over absorbed because actual hours are either less or more than the hours on which the overhead rate was based.

In this article we will discuss about the measures to obviate idle capacity in a factory. It continues in step by step fashion and ends with the apportionment of cost of that service department which renders least service to the other service departments. XYZ Ltd. has three production departments and one service department, namely P1, P2, P3, and S1, respectively.

Who is Responsible For Idle Capacity Variance?

The stackArmor OpsAlert Cloud utilization scorecard helps quickly identify cloud spend and idle capacity. (ii) The extent to which the facility was actually used to meet demands during the accounting period. A multi-shift basis should be used if it can be shown that this amount of usage would normally be expected for the type of facility involved. Sometimes the working capacity of each production stage is not matched.

It is
applicable to questions related to choosing the basis for overhead rates, how to
treat capacity costs and pricing decisions. Idle capacity is the remaining amount of capacity left in a company after productive capacity and protective capacity have been eliminated from consideration. Protective capacity is, to some degree, a matter of opinion, for it can involve a substantial proportion of total capacity if a company intends to retain sufficient capacity to cover extremely large (and rare) production spikes. Conversely, if management is content to allow some occasional downtime at its bottleneck operation, then it may define protective capacity as a much smaller number.

Allowable and Non-Allowable Costs Guidance

M/s SISTAS & Co. manufacture product A at the rate of 80 pieces per hour. The company has been producing and selling 1,60,000 units annually during the period 2005 to 2009. However, during the year 2010 the company was able to produce 1,46,000 units only. Under-absorption represents the cost of unutilized capacity due to not achieving the target of expected sales. If the actual capacity is more than the capacity based on sales expectancy, there would have been over-absorption. Simple Subscription Pricing The service is available on a fixed price annual subscription tied to cloud consumption.

If the projected monetary gain from the sale of idle equipment is minimal, then it usually makes sense to retain the assets, thereby essentially expanding the protective capacity of the business. This is usually the case, since the older and least efficient machines that are typically sold off have reduced market value. If you have idle capacity, you should treat it as a period cost and charge it to expense in the period incurred, rather than allocating its cost to inventory. Doing so flushes out the expense, rather than incorrectly retaining it within the business as an asset. Idle Production Capacity may be different depending on the nature of manufacturing and the management intention. If the management allows some downturn during the operation, there will be less protective capacity require.

Moreover, some companies may decide to purchase the WIP from the others manufacturing. They will sub-contract from outsiders as the cost of purchase is lower than the cost of idle production capacity. Capacity utilisation refers to the extent to which the capacity of a factory or plant is worked.