Most cost models tell you what things cost. TDABC tells you something more useful: how much of your capacity is actually being used — and what the unused portion is costing you.
This distinction matters more than it sounds.
Practical vs. Theoretical Capacity
In TDABC, every cost pool is associated with a practical capacity — the amount of productive time or throughput available after accounting for breaks, absences, maintenance, and other unavoidable downtime.
Typically, practical capacity is 80–85% of theoretical capacity. A department with 5 people working 8 hours/day does not have 200 hours of productive capacity per day — it has closer to 160–170.
The cost per unit of capacity is then calculated by dividing the total cost of the resource pool by its practical capacity. This is the cost rate used in time equations.
Why This Matters: Idle Capacity Cost
If your model shows that a department is consuming 120 of its 160 available hours, 40 hours are idle. That idle capacity has a cost — the people, space, and overhead allocated to that department are being paid regardless of utilisation.
Traditional cost models absorb idle capacity costs silently into product/service costs, making everything appear slightly more expensive than it should be at full utilisation. TDABC makes idle capacity explicit and visible as a separate line.
This serves two purposes:
- Management visibility: You can see which departments have excess capacity and by how much. This is direct input for hiring decisions, pricing decisions (fill capacity with lower-margin work), and operational restructuring.
- Accurate product costing: When idle capacity is separated, product and service costs reflect the true cost of production at current utilisation — not an inflated rate that includes unused capacity.
The Capacity Utilisation Insight in Practice
One manufacturing client we work with discovered — through their CostCtrl TDABC model — that their finishing department was operating at 58% practical capacity utilisation. Their overhead rate was based on 100% utilisation. Every product was being charged 1.72x its true production cost at full capacity.
The result: two product lines that the model showed as marginally unprofitable were, at full capacity, actually profitable by 8–12%.
The fix was not to reduce cost — it was to fill capacity with appropriately priced work, informed by the true cost rate rather than the inflated one.
Capacity as a Pricing Input
When you know your capacity utilisation rate, you can price strategically:
- Below 70% utilisation: Marginal cost pricing may be appropriate for incremental volume — you’re covering variable cost and contributing to fixed overhead
- 70–90% utilisation: Standard pricing with full overhead allocation
- Above 90% utilisation: Premium pricing — you’re at near-full capacity and accepting new work displaces existing or requires investment in new capacity
Most companies price on the same schedule regardless of where they are on this curve. That’s leaving money on the table in high-utilisation periods and over-pricing in low-utilisation ones.
Building Capacity Visibility into Your Model
In a well-structured TDABC model, capacity utilisation is not calculated manually — it falls out of the model as a byproduct. The time equations consume capacity from each resource pool. The remaining capacity after all assignments is idle capacity.
CostCtrl surfaces this automatically in the capacity dashboard: you can see utilisation by department, by period, and by cost pool — and simulate what happens when you add volume, change the product mix, or restructure a department.
Start with the Profitability Health Check to assess your current capacity visibility and TDABC process design maturity.