Idle Capacity as a Loss--Fact or Fiction.

Abstract The purpose of the article is to set forth the general view that there is no such thing as a loss due to idle capacity for purposes of income measurement. In order to illustrate this point of view the fixed or capacity costs of manufacturing will be classified as capacity costs related to fixed assets and capacity costs related to semi- variable costs. In each case the concept of an idle capacity loss will be shown to be inconsistent with the process of income measurement. The portion of fixed manufacturing overhead costs related to fixed assets should be allocated to production under a unit-of-output amortization plan which cannot yield an idle capacity loss. The portion of fixed manufacturing overhead costs related to semi-variable cost inputs should be allocated to whatever output is produced within the range for which these costs are absolutely necessary, therefore they cannot yield an idle capacity loss on the basis of changes in production volume. Since there are no other categories of fixed manufacturing overhead costs and variable overhead costs are allocated to actual output, idle capacity as a loss does not really exist.