Labour Capacity Utilization Formula

Labour Capacity Utilization Formula

Labour Capacity Utilization formula has been shown below. Labour capacity utilization formula has been further explained with simple example. Labour Capacity utilization ratio mainly focuses on the actual utilization of available resources.

Labour Capacity Formula =   Labour Hour Spent    x 100                                           Total Available Hour

Labour Capacity Utilization Formula Example

Total Labour Hours available = 1500

Actual Hour utilized or spent = 1200

Calculate Labour Capacity

Solution

Labour Capacity utilized =   Hour Spent by Labour   x 100

                                         Total Available hour

= (1200/1500) x 100

=  80%

  80% of total capacity utilized, it means that 20% capacity is idle.

Significance of Capacity Utilization Calculation

One of the main reasons for calculating labour capacity utilization is to get information about the capacity utilized and idle Capacity or extra Labour resources. This information can be utilized for the following purposes;

1.   Resource Allocation

Idle resources or capacity can be utilized in another project or activity. Effective utilization will improve the profitability of the organization. Thus capacity utilization information may be used to improve the profitability of the organization.

2.   Cost Reduction

Idle labour resources or capacity may be terminated, if there is no alternate use or immediate future need of such resource. This will reduce labour cost of the company and this reduction in labour cost will improve the profitability of the organization.

3.   Future Resource Planning

Capacity utilization ratio information can be utilized by the management for future resource planning. Management can plan and budget the resource more effectively.

Capacity Utilization and Efficiency

It is important to mention that capacity utilization and labour efficiency has no relationship, it means that capacity utilization ratio does not tell anything about the labor efficiency or performance; rather capacity utilization just focuses on utilization of resources or capacity.

Labour Capacity Utilization Formula Practice Question

Total Labour Hours available = 1800

Actual Hour utilized or spent = 1600

Calculate Labour Capacity