Definition of Capacity cost:
A capacity cost is an expense incurred by a company or organization in order to provide for or increase its ability to conduct business operations at larger scale. Capacity costs are therefore associated with things that allow a business to increase its production above a set point or reach markets beyond their current distribution network.
Capacity costs are a given in business if the business wishes to grow beyond its current production capacity and generally can be reduced or avoided only by reducing staff or shutting down business locations, both of which may reduce capacity or outsourcing.
A fixed expense for a company that will provide for or increase business operations. The costs do not usually change with production levels. In order for a business to function it must incur these expenses regardless of how much or how little business is actually being done. The costs can be reduced or avoided only if the business locations are closed or due to outsourcing of work. Examples of capacity costs may include lease payments, machine/equipment depreciation, insurance, utilities, and insurance costs.
How to use Capacity cost in a sentence?
- Capacity costs are a necessary part of doing business, and are especially relevant for new and emerging companies that are oriented toward rapid growth.
- These costs may include items such as lease agreements on larger facilities, purchase and depreciation of new equipment, as well as increased costs to operate and maintain those larger or newer assets.
- A capacity cost is incurred when a business or other organization spends money in order to expand operations or increase production capacity.
Meaning of Capacity cost & Capacity cost Definition