Plant capacity costs

Plant facilities represent an investment that leads to continuing cost for taxes, interest, depreciation and maintenance. These costs are, for the most part, fixed. Consequently, the higher the volume of pro­duction attained with given facilities, the lower is the cost per unit of such overhead; conversely, as production falls off there are fewer units over which to spread overhead and unit costs rise. Thus idle capacity may result in "unabsorbed" overhead. Idle capacity may result from managerial inefficiency; therefore, executives should watch the extent to which capacity is utilized. The knowledge of idle capacity may enable corrective steps to be taken; advance information as to prospective idle capacity may make possible its prevention.