Equipment costs are the expenses incurred to purchase, lease, maintain, and repair the tools, machinery, and other physical assets necessary for business operations.
Primary Implication
If equipment costs as part of your Cost of Goods Sold aren’t rising and falling with sales, your equipment costs represent more of a fixed than a variable cost for your business. This is okay as long as the equipment cost as a percentage of sales is within the range of what you planned.
It can be costly if the percent of equipment cost to net sales is rising faster than sales. You can prevent this by first planning for your equipment cost by month and then reporting monthly variances between actual and planned results. If you are trending high, you have a readily identified business area to improve.
Overview
Tracking Equipment Costs for Better Decision-Making
Equipment Costs encompass all the expenses associated with acquiring, using, and maintaining the physical assets a business needs for its operations. This includes everything from purchasing and leasing to repairs and maintenance.
Types of Equipment
Equipment refers to the tangible assets used in a business’s day-to-day operations, excluding land, buildings, and vehicles. Examples include:
- Manufacturing: Assembly line machinery, robotic arms, conveyor belts
- Construction: Excavators, cranes, cement mixers
- Technology: Servers, computers, networking equipment
- Healthcare: Medical imaging devices, surgical tools
- Retail: Point-of-sale systems, display cases
Equipment Costs and COGS
Some equipment costs are considered part of the Cost of Goods Sold (COGS). These are the direct operating costs incurred in producing a product or delivering a service, such as:
- Fuel and lubricants
- Coolants and cleaning agents
- Small tools and accessories
Capitalized Equipment Costs
When a piece of equipment is expected to last longer than a year, its cost is typically capitalized. This means the cost is spread out over the equipment’s useful life through depreciation. Capitalized costs include:
- Initial purchase price
- Shipping and handling
- Installation and testing
- Costs that extend the equipment’s useful life
Depreciation
Depreciation is the process of allocating the capital cost of an asset over its useful life. Various methods can be used to calculate depreciation, such as straight-line depreciation and accelerated depreciation. The expenses associated with depreciation are reported in Nonoperating Expenses and are not part of the direct costs reflecting Equipment Costs.
Why Equipment Costs Matter
Understanding equipment costs is crucial for businesses to make informed decisions about:
- Budgeting and financial planning
- Pricing strategies
- Investment in new equipment
- Leasing vs. buying equipment
Knowing your equipment costs is important for making smart business decisions. It helps you set budgets, figure out how much to charge for your products or services, and decide whether to buy or lease equipment. By keeping track of these costs, businesses can run more efficiently, make more money, and stay successful in the long run.