Capacity Related Cost

Capacity related cost are costs that are based on the amount acquired rather than the amount used. A capacity related cost is a fixed expense that is incurred by a company or organization in order to provide for or increase its ability to conduct business operations. The capacity related costs generally do not vary with production levels and can be reduced or avoided only by shutting down business locations or outsourcing.

The examples of capacity related costs include items such as rent or lease payments, depreciation on equipment or machinery, property taxes, insurance and basic utilities such as heating. These expenses are incurred in order to provide a functional office or business location where a company can conduct operations and are incurred regardless of how much (or how little) business is actually conducted.

Capacity related cost are fixed costs that are incurred to provide facilities that increase a firm's ability to produce such as those relating to space, equipment, and factory buildings. Capacity related cost can either be direct costs or indirect costs. However most of the capacity related costs are indirect costs. The exclusivity of the use by the cost object defines whether a cost is direct or indirect. A direct cost means that resource that created the cost was acquired for and used by a single cost object. The capacity related costs are fixed in the short run

Capacity cost helps in decreasing overhead of the business and allows the business to earn more of a net return on the operation without actually making any chances to production levels. The capacity cost may reduce the cost and thus increase the profitability of a business. However it cannot be eliminated without creating a negative impact on the entire operation.

Questions

• What is capacity related cost?
• What are the advantages of capacity related costs?