A measure of the extent to which a firm’s capacity (in terms of labour ,machinery, etc) is being used. See capacity. It is It is usually expressed as a percentage and is calculated by dividing the actual output into the maximum output possible for a particular period of time and multiplying the resultant figure by 100. Example: A business is capable of producing 5,000 units a month. It only produces 4,000 units a month. Thus, its capacity utilisation rate is 80% (4,000 / 5,000 x 100). In other words, it has 20% spare capacity (1,000 / 5,000 x 100). It is vital for a business to manage capacity utilisation to avoid situations of under-utilisation (excess capacity or spare capacity) as well as over-utilisation – capacity shortages.