Unused capacity is a cost. It should not hide inside the product.
When a line runs at 60 percent, the cost of the missing 40 does not vanish. Traditional costing buries it inside the units that were made, making them look more expensive and hiding the real problem. TDABC does the opposite: it charges product only for the capacity it used, and reports the unused capacity as its own line, owned by the decision that created it.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
Optimal OEE is 85 percent or above, but the manufacturing average is 60 to 65 percent, and each point of OEE cuts unit cost by roughly 0.5 to 1.0 percent. TDABC costs product at a capacity cost rate based on practical capacity (80 to 85 percent of theoretical) and reports unused capacity separately, so idle time becomes a visible, manageable cost instead of a hidden surcharge on every unit produced.
Idle time does not disappear. It hides in the units.
Traditional costing divides total cost by the units actually made. So when a line runs below capacity, the cost of the idle time is quietly loaded onto the units that did run. They look more expensive than they are, and the actual problem, an under-utilised line, is invisible because it has been smeared into product cost. Managers then chase the wrong fix: they question the product instead of the utilisation.
Capacity blind spots also distort the biggest decisions. Manufacturers that put cost at the centre of strategy are 2.5 times more likely to invest well in capacity, and roughly 40 percent of capacity capex fails without it. You cannot size a line you cannot cost.
WHERE THE UNUSED CAPACITY GOES
Illustrative. Standard costing inflates the product with the cost of the gap. TDABC charges product only for the capacity it used, and reports the unused capacity as its own owned line.
Cost the work, then own the void.
Because the capacity cost rate is built on practical capacity rather than theoretical, product absorbs only the cost of the time it actually consumed. The difference between practical capacity and time used is reported as unused capacity, and attributed to the decision that owns it, demand, scheduling or maintenance, not loaded onto whatever happened to run. An auto-parts manufacturer built exactly this kind of capacity-sensitive model to make the void visible and actionable rather than smeared into product cost.
Manage the void. Do not disguise it.
Improve OEE on the constraint
Every point recovered on the bottleneck cuts unit cost by 0.5 to 1.0 percent. Fix the constraint, not the average.
Reschedule to fill
Move work to absorb the gap before adding capacity. The cheapest capacity is the capacity you already own and are not using.
Right-size or repurpose
Where the gap is structural, repurpose or right-size the line. The decision rests on a number, not a hunch about utilisation.
Price dedicated capacity
When a customer needs capacity held for them, price it. Readiness is a cost, and the customer who requires it should carry it.
Frequently asked questions
- How does unused capacity distort product cost?
- Traditional costing divides total cost by the units actually made, so when a line runs below capacity, the cost of the idle time is loaded onto those units. They look more expensive, and the real problem, an under-utilised line, is hidden inside the product. TDABC costs product at a rate based on practical capacity and reports unused capacity separately.
- What is a typical OEE, and what is it worth?
- Optimal OEE is 85 percent or above, but the manufacturing average is 60 to 65 percent. Each percentage point of OEE recovered cuts unit cost by roughly 0.5 to 1.0 percent, so the gap is large and quantifiable once unused capacity is a visible, owned number rather than a hidden surcharge.
- What do you do once unused capacity is visible?
- Attribute it to the decision that owns it, demand, scheduling or maintenance, then improve OEE on the constraint, reschedule to fill the gap, right-size or repurpose the line, or price in dedicated capacity for specific customers. The goal is to manage the gap, not disguise it inside the product.
Put a number on the capacity you are not using.
The Profit Check needs no data upload. It shows where unused capacity is most likely hiding in your product cost, and what closing the gap is worth.
- Duration
- 12 to 15 minutes
- You receive
- Score, 7 dimensions, sector benchmark
- Price
- Free, no email needed
Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Lectured alongside Professor Robert S. Kaplan at the CFO conference in Amsterdam (2009).
Call +351 910 313 731
