Capacity variance costs arise from which situation?

Capacity variance costs occur when there is a discrepancy between the actual output capacity and the planned or expected capacity. This situation typically arises when there is a significant change in capacity that goes beyond the normal operational limits, such as expanding production capabilities or scaling back due to unforeseen events. It means that the organization is adjusting its capacity to meet demand but not within the standard operating parameters.

When operations undergo changes that are beyond what is considered "normal," it can lead to increased costs associated with either underutilization or overutilization of capacity, resulting in variances. For instance, if production capacity is increased to accommodate a new product line without proper planning, it may lead to inefficiencies and costs that deviate from the budgeted capacity costs.

In contrast, normal operational fluctuations, increased demand, and unexpected equipment failures do not inherently relate to changes in capacity planning beyond the expected range. Such factors might affect production but do not directly translate into capacity variances of the same nature as capacity changes that are beyond what is typically anticipated.