What does capacity utilization measure?

Capacity utilization measures the extent to which a company's installed productive capacity is being utilized. It indicates how efficiently a business is using its resources, particularly its manufacturing capabilities, to produce goods or services. This metric is crucial for understanding whether a company is optimizing its operational efficiency or if there is excess capacity that could be better utilized. A higher capacity utilization rate generally reflects a more efficient use of available resources, indicating that the company is effectively meeting demand without significant idle capacity.

In contrast, the other options do not accurately describe capacity utilization. For instance, measuring production costs focuses on financial expenditures rather than the physical use of resources. Assessing employee work hours pertains specifically to labor productivity and does not take into account the overall utilization of machinery or facilities. Similarly, total output of machinery may reflect production volume but does not convey the percentage of capacity that is being actively used. This distinction is important for businesses aiming to improve their operational strategies and resource management.