Capacity Utilization Rate (CUR)

What is Capacity Utilization Rate?

As per the Capacity Utilization Rate meaning, it is a parameter that is used for measuring the overall proportion of the estimated economic output. The parameter is displayed in the form of a percentage and helps in providing an insight into the total slack that might be present in the given organization or Economy at a given point of time.

Capacity Utilization Rate Formula

It is quite simpler to evaluate the Capacity Utilization Rate. It can be done with the help of a simple formula:

Capacity Utilization Rate = (Actual Output/Potential Output) X 100

Capacity Utilization Rate Meaning

Capacity Utilization Rate serves to be a vital parameter in terms of the overall operation of a business. Moreover, it also serves as the major Economic Indicator when the same gets applied to measure the aggregate productive capacity of the given unit.

A company that boasts a utilization of less than 100 percent is capable of theoretically increasing the overall production without leading to extra overhead costs in association with buying new property or equipment. Economies that tend to feature the ratio of less than 100 percent are known to symbolize significant increases in the overall production without having the need to push previous highs. The given concept of Capacity Utilization Rate is known to be best applied to the physical goods and their production. This is because these factors are quite simple to quantify.

Types of Capacity Utilization Rates

There are basically two types of Capacity Utilization Rates. Here is an insight into them:

Corporate Capacity Utilization Rates

Capacity Utilization Rates are regarded as vital factors when it comes to determining the ongoing operational Efficiency of the company. Moreover, it also helps in providing an insight into the given cost structure –both in the short term as well as in the long term. It can also be used for determining the given level at which unit costs are going to rise.

Historical Capacity Utilization Rates

In India, the RBI (Reserve Bank of India) is responsible for gathering and publishing data on the respective capacity utilization. The value for capacity utilization is known to fluctuate with changing business cycles and with the companies making adjustments with the production volumes as a response to the overall changing demands.

Demand is known to decline steeply during periods of recessions due to the rise in unemployment, dip in business investments, and waning consumer expectations.

Economic Significance of Capacity Utilization

Economists in India and other parts of the world are known to make use of this metric to indicate Inflation pressures. A low value for capacity utilization rate is going to result into the overall decrease in price as there is excess capacity along with the presence of insufficient demand for the given output. Economies featuring the capacity ratio of less than 10 percent can help in significantly boosting production without leading to any changes in the associated costs.

Conclusion

Capacity Utilization Rate is regarded as the best tool when it is utilized for companies that are known for Manufacturing physical products rather than services.