Capacity related resource

The capacity related resources are resources that are purchased in advance. The capacity related costs generate cost based on the amount acquired rather than the amount used. These resources are committed resources. The capacity related resources are supplied in advance of usage. These resources are acquired by use of an explicit or an implicit contract in order to obtain a given quantity of resource. However it does not consider if the quantity of the resource is fully used or not. The capacity related resources may exceed the demand for their usage, thus unused capacity may occur.

Organizations can contract to supply most of their resources from external vendors before they are actually used. The organization makes a commitment or actual cash outlay to acquire such resources that will be used for current and future activities. For example, an organization acquires building and equipment that will supply a capacity of work for the future years. This transaction leads to an expense being recognized in each period of the useful life of the resource. The committed resources are costs incurred that provide long-term activity capacity.

Capacity related resource costs become variable costs over long periods of time through a two step procedure. First the demands for the resources supplied can be changed because of the shifts in the activity levels. For the batch and product sustaining resources, the activity levels change because of changes in variety and complexity. In the next step the organization changes the supply of committed resources, up or down to meet the new level in demand for the activities performed by those resources. If the capacity related resource costs should become variable in the downward direction the organization must manage the unused capacity of these resources out of the system. 

Questions

• What is capacity related resource?
• How does capacity related resource become variable costs?