Business, Legal & Accounting Glossary
Capacity Utilization Rate, also called Operating Rate, is a metric used to compute the rate at which output levels are being met or used. The output is displayed as a percentage.
The capacity utilisation rate is the value of production capacity which is actually being utilised over a specific period of time.
The capacity utilisation rate is measured in percentages and is adjusted to reflect production aptitude of various capital goods and natural resource producers, as well as factories, utilities and the like. Although lower capacity utilization rate yields potential for increased output, eighty-five per cent tends to be a critical benchmark value. Having surpassed the eighty-five per cent barrier, the capacity utilisation rate may signal a possibility of impending inflation.
The capacity utilisation rate is an important measure of economic performance. Thus, the capacity utilization rate is carefully analyzed by the Fed. However, the capacity utilisation rate does not invariably provide the most accurate feedback on economic and market conditions.
Hence, the capacity utilization rate is corroborated with other economic indicators to elucidate the overall economic posture.
The Capacity Utilisation Rate assists in verifying the level at which piece costs will rise. The rate is primarily used for companies that manufacture physical products instead of services, as it is easy to quantify goods than services. The Capacity Utilisation Rate can provide you with a clearer idea of the total utilization of resources and how better the production company can fare in case the total output is increased without it affecting the cost of production to the company.
Although Capacity Utilisation Rate is important, it should not be used in isolation. The decrease in the capacity utilisation rate percentage denotes business slowdown, an increase shows business expansion.
Capacity Utilisation Rates can be calculated by industry or sector as well as by individual company. By graphing the Capacity Utilisation Rates of major industries, analysts can provide an indication of whether or not the stock market will rise or fall.
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This glossary post was last updated: 25th March, 2020 | 5 Views.