What is Idle Capacity Cost?
Idle capacity cost is the cost of factory or service capacity that is paid for but not used in production. Even if a machine is not running, depreciation, rent, supervision, and insurance still accrue — these costs are charged as period expenses when they exceed the cost of the actual output.
How It Works
- Identified by comparing actual production to practical capacity
- Idle capacity = (Practical capacity − Actual output) × Standard cost per unit of capacity
- Under IFRS (IAS 2), unallocated fixed overheads from idle capacity must be expensed in the period, not capitalized into inventory
- Helps managers see the true cost of running below the planned level
- Common in seasonal industries and during demand downturns
Saudi Context
Saudi manufacturers — especially in petrochemicals, cement, and construction-related plants — track idle capacity closely. ZATCA tax adjustments and IFRS compliance both require unabsorbed fixed costs to flow to the income statement rather than be hidden in inventory.
Example
A Saudi cement plant has a practical capacity of 1.2M tons/year but produced only 900,000 tons. Fixed overheads were SAR 240M. The standard rate is SAR 200/ton × 1.2M tons = SAR 240M absorbed at full capacity. With actual at 900K tons, only SAR 180M is absorbed; SAR 60M is idle-capacity cost expensed in the period.