How to find the capital intensity
Video: Labour and Capital Intensity 2024, July
Capital intensity - this is the inverse of return on assets, which shows the value of fixed assets per unit of output produced by the enterprise. This indicator serves to determine the effectiveness of the use of fixed assets of the organization.
Instruction manual
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Capital intensity is calculated as the ratio of the average annual value of fixed assets to the volume of output. The obtained value shows how much money needs to be invested in production assets in order to obtain the necessary output. With increasing efficiency in the use of fixed assets, capital intensity decreases, and capital productivity increases.
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It should be noted that when calculating this indicator, only the cost of fixed assets is taken into account, and not fixed assets in general. Moreover, depreciation is not deducted from their original cost. This is the most significant drawback of the indicator of capital intensity, since the process of its comparison for organizations with different ages, fixed assets is rather difficult.
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For a more adequate comparison, the capital intensity indicator is calculated as the ratio of the average annual value of fixed assets to the volume of output, rather than sold, for a given period. Indeed, when determining the capital intensity, it is important to find out the effectiveness of the use of funds, which means that information on the number of products sold can be ignored.
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The capital intensity indicator is used in the practice of planned calculations, in the design of construction, determining the volume of capital costs, etc. In addition, it must be remembered that, to a large extent, the value of this indicator has a direct impact on production efficiency in the organization. For example, when switching to work from a single-shift regime to two-shift or three-shift, the efficiency of using existing fixed assets increases, which means that the ratio of capital intensity decreases. Such optimization of production can give a huge economic effect for the enterprise as a whole.
