What is idle capacity?

Idle capacity is the remaining amount of capacity left in a company after productive capacity and protective capacity have been stripped out.

Productive capacity is that portion of a work center's total capacity needed to process currently scheduled production, while protective capacity is additional capacity held in reserve to ensure that a sufficient quantity of parts can be manufactured to adequately feed the bottleneck operation. 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.

Thus, depending upon management's intentions regarding running the bottleneck operation, idle capacity may be either nonexistent or quite large. If you have idle capacity, you should treat it as a period expense and charge it to expense in the period incurred, rather than allocating its cost to inventory.

If you are evaluating whether to eliminate assets from a work center, you should only sell of those assets associated with idle capacity - selling off protective capacity puts a company's profit-making potential at considerable risk.

Idle capacity can also be used to accept new orders from customers that exceed current production levels, though there must be idle capacity available in the bottleneck operation. Otherwise, taking on additional orders will merely increase the size of the backlog in front of the bottleneck operation.

Related Topics

Overview of capital budgeting
Throughput capital budgeting
Types of capacity