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It is important to know what category of account you are working with when budgeting and tracking spending. The different categories of accounts behave differently so knowing which category you are working with will provide insight into the budgeting and tracking process.
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Quick reference
Cost Account Characteristics
Business expenses are budgeted and tracked in financial accounts. While a company may have hundreds of accounts in their system, they can be categorized into three broad categories based upon how they behave. The categories are capital expenditures, operational expenditures, and variable costs also known as cost of goods sold.
When to Use Cost Account Characteristics
It is important to know what category of account you are working with when budgeting and tracking spending. The different categories of accounts behave differently so knowing which category you are working with will provide insight into the budgeting and tracking process.
Instructions
- There are three broad categories of expenditures, capital expenditures, operational expenditures, and variable costs.
- Capital expenditures (CapEx) accounts are the accounts that track the cost of procuring new fixed assets for the business.
- CapEx costs are budgeted based upon the investment strategy, normally approved during the budget planning process. Therefore many people think that all costs for strategic projects are CapEx costs. However, the only costs that are truly CapEx are the costs associated with the fixed assets. If there are other costs associated with the strategic projects, they should be classified as OpEx.
- The assets represented by CapEx accounts must be taxed per the appropriate location’s tax laws for property tax.
- CapEx accounts often include the Depreciation or Amortization accounts associated with each fixed asset (more about this in another module).
- Since CapEx accounts are usually associated with projects, the timing and tracking of the costs will be based upon the project schedule.
- Operational expenditures (OpEx) are the costs of running and sustaining the business. We sometimes think of them as the costs that must be paid just to open the doors for business.
- OpEx costs are budgeted based upon the business plan for running the operation, normally approved in the annual planning process.
- OpEx costs can be further subdivided into five categories.
- Fixed costs – these are costs that have a set amount that occurs each month and that amount cannot be easily changed by operating managers. The amount is normally controlled by contracts. Examples are rent, insurance, permits.
- Overhead costs – these costs are associated with operating the infrastructure of the business. They are the costs necessary to keep the doors open and the business running. Since they are tied to business activity, operating managers cannot easily change them on a daily basis, but they can change them through changes to the business structure and operations. Examples are the HR, Finance, IT, and legal departments, utilities, security, administrative support.
- Project costs – these are the costs of conducting projects that are not included in the CapEx accounts. This is budgeted and tracked based upon the project plan and performance. These costs are the easiest in the business for an operating manager to change – just by changing the date. They often include travel costs, publication costs, and cost of the materials used in the project.
- Interest costs – these are the costs to the business to pay outstanding interest on the various types of business debt. These costs typically are totally outside the control of operating managers and are handled by the corporate Finance department. The budgeting and tracking is based upon the debt contracts, when they are placed and when they are due.
- Taxes – these costs are due to government entities and are determined by the nature and volume of business activity at a given location. Normally a company cannot change their tax liability; however, it is possible to negotiate extensions in order to change the timing of a tax expense.
- Variable costs, or Cost of Goods Sold (COGS) are the costs of making the product or service that is sold to external customers.
- These costs are determined by the product or service design and the sales volume
- These costs are budgeted based upon a sales plan and the budget changes whenever the sales plan changes.
- These costs are recorded in the financial system based upon an actual sale of goods or service and the actual cost of that product or service is what is recorded.
- These costs will vary based upon the sales varying and the underlying costs of labor or material needed to make and deliver the product varying.
Hints and Tips
- Remember that each transaction has both an amount and a date. It is often easier to change the date on a transaction in a CapEx and OpEx account than it is the amount of the transaction. The date for Variable Cost accounts is based upon the sales date, so it is harder for an operating manager to impact those.
- Just to be very clear – you change the date by changing when something actually happened. Do not put false information into your financial system. It must record the actual date and the actual amount. Management must be proactive in order to ensure the transaction occurs on the desired date.
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