What Is a Capacity Cost?

A capacity cost is an expense incurred by a company or organization in order to provide for or in🌄crease its ability to conduct business operations at larger scale. Capacity costs are therefore associated with things that allow a business to increase its production above a set point or re✤ach markets beyond their current distribution network.

Capacity costs are a given in business if the business wishes to grow beyond its current production capacity and generally can be reduced or avoided only by reducing staff or shutting down business locations, both of which may reduce capacity or outsourcing.

Understanding Capacity Costs

Capacity refers to the maximum level of output that a company can sustain to make a product or provide a service. Planning for capacity requires management to accept limitations on the 澳洲幸运5官方开奖结果体彩网:production process. Capacity requirements planning (CRP) is the process of discerning a firm's available production capacity and whether it can meet its production goals. Capacity requirements planning weighs the costs of increasing capacity against the company's actual produ꧒ction capabilities to see if the current capacity can successfully meet the existing production schedule and at budget.

Capacity costs include a wide range of cost types. Some are fixed and are not affected by small shifts in business productivity. Typical examples of this nature are items such as rent or lease payments, 澳洲幸运5官方开奖结果体彩网:depreciation on equipment or machinery, 澳洲幸运5官方开奖结果体彩网:property taxes, insurance, and basic utilities such as heating. If a company dramatically increases its sales and needs to increase its production to make sure products are available to its new customers, the business may need to add additional manufacturing facilities. That would raise all of the mentioned capacityꦐ costs.

Other Considerations

Capacity costs can also be more closely related to consumer demand. If a distribution center is experiencing a period of high volume due 💮to increased sales productivity, they might add additional workers or ad🅰ditional shifts to keep up with the high demand. These increases in personnel are also capacity costs, as they allow the business to increase its production capacity. Once the high volume period passes, the company can scale back on personnel to reduce their costs.