What is fixed capital consumption?
Fixed capital concerns the physical assets of the company, including things such as buildings and production facilities. The value of this capital is constantly making it impossible due to wear or simply the effects of time. Fixed capital consumption concerns part of these assets that increased for a certain period of time. Although it is similar to depreciation, both concepts have certain key differences in terms of their use and how they are calculated. Fixed capital consumption can also be known as adjustment of capital consumption, capital power consumption or simply CFC.
No matter how carefully the business keeps its equipment and assets over time, these assets almost always lose value. This value loss can be attributed to wear and tear, age or severe use. It may also occur due to accidents or damage or natural behavior. Some may also be accused of new technologies that leave a business with obsolete or outdated equipment. Consumption capital reflects the value of all theseTrack as well as all additional expenditures incurred in the exchange of these assets.
While traditional depreciation is calculated on the basis of historical costs on the item, the consumption of fixed capital reflects the lost value based on the current price. This means that CFC is often much greater than depreciation because it reflects the actual cost of compensation, not past costs.
businesses prefer this measurement rather than depreciation because it brings more financial benefits. This value loss can be used as a depreciation against the company's gross income for tax and accounting purposes, helping to save the company's money. Since the value of the capital is constantly changing, its consumption must be recalculated for each accounting period to reflect its actual value.
Fixed capital consumption is also used in macroeconomic analyzes to study the economy as a whole. For example, the rough national product (GDP) lCalculate from the addition of aggregated net income of the country plus all taxes from trade taxes to aggregated CFC. In the United States, CFC represents a complete 12% of GDP according to the 2009 economic cooperation and development organization. Therefore, the inability to include the consumption of fixed capital in GDP calculations can have a significant impact on this number. Economists can also calculate a clean domestic product (NDP) by deducting CFC from GDP