Idle capacity definition
/What is Idle Capacity?
Idle capacity is the remaining amount of capacity left in a company after productive capacity and protective capacity have been eliminated from consideration. 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 are evaluating whether to eliminate assets from a work center, you should only sell off those assets associated with idle capacity - selling off protective capacity puts a company's profit-making potential at risk.
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Accounting for Idle Capacity
If you have idle capacity, you should treat it as a period cost and charge it to expense in the period incurred, rather than allocating its cost to inventory. Doing so flushes out the expense, rather than incorrectly retaining it within the business as an asset.
When to Retain Idle Capacity
If the projected monetary gain from the sale of idle equipment is minimal, then it usually makes sense to retain the assets, thereby essentially expanding the protective capacity of the business. This is usually the case, since the older and least efficient machines that are typically sold off have reduced market value.
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.