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Capital services reflect the goods a company receives from its assets. Though a monetary value may be part of this review, it is not always necessary. Assets included in this process are equipment, structures, land, and inventories. For physical calculations, companies look at the quantity of goods received from each asset. When reviewing the monetary value received, the calculation includes a weighted-average growth rate for each asset.
Companies often review the physical flow of production inputs for the capital services calculation. Different assets can provide different inputs for use in producing valuable customer goods and services. For example, computer software may have a shorter lifetime than a piece of land. Therefore, the production inputs provided are different for each asset. Computing the value for the physical flow of goods from assets is then necessary to compute the total value of capital services within the business.
To compute the value of physical input flow, a company must multiply the physical flow for inputs from each asset by the cost of each input. This calculation provides a basic formula for computing operational costs. For example, a computer program offers 10 log-in access codes; the cost for each access code is $500 US Dollars (USD). The total cost for these necessary inputs is $5,000 USD. The asset must then provide capital services that exceed this cost in order to bring benefits to the business.
Another formula is the weighted-average growth rate. Companies can assign percentages to different asset classes that provide the significance — or weight — that each group brings to the company. Production equipment, for example, may have a weight of 35 percent. This indicates the total value of this asset group compared to all the other asset classes. Companies can then multiply this percentage by the growth rate for all assets, computing the total value derived from the capital services.
Computing the per-unit figures for the above dollar values is also possible. The company must simply divide the total cost or income by the production output. This provides a basic per-unit value from a company’s capital services. A per-unit calculation is often necessary because more than one department may derive benefits from the capital services in a company.
The purpose of capital services computations is to determine how much value each asset class brings to a business. Over time, assets become worthless to a company. If a business determines that assets become worthless too quickly, they may need to avoid purchasing and replacing these items. Essentially, the asset class continues to be a drag on a company’s financial resources.