Capacity Variance is that part of volume variance which arises because of over-utilization or under-utilization of plant and equipment. The working in the factory is more or less than the standard capacity.
This variance arises due to idle time caused by strikes, power failure, and non-supply of materials, breakdown of machinery, absenteeism etc.
Capacity variance is calculated as:
Standard Rate (Revised Budgeted Units– Budgeted Units) or, Standard Rate (Revised Budgeted Hrs- Budget Hrs).