Equipment is a broad term applied to several types of assets in accounting terminology. Types of equipment can include automobiles, construction vehicles, manufacturing devices, and similar items placed in use by businesses. Equipment operating costs are also varied, though each type relates to the specific piece in use. Accountants look at each equipment-related expense and classify it according to the company’s accounting process. In some cases, equipment operating costs go into the allocation pool for manufacturing goods, while others go directly onto an income statement as an expense.
A company generally experiences two types of equipment operating costs: fixed and variable. The fixed cost types go in an overhead category for later cost allocation to all goods produced in a given time period. Variable costs relate to actual production and are typically easier to allocate to each item produced. As the names imply, fixed operating costs do not change over time, while variable costs do. Failure to classify the costs properly can result in skewed outputs and poor cost allocation.
Fixed equipment operating costs include payments for the item, depreciation, and taxes associated with running the equipment. Each month, accountants compute these figures and place them into the general overhead account for later cost allocation. If accountants cannot allocate the associated fixed cost, then the item goes as an expense onto the income statement. In accounting terminology, these items are period costs. Attempting to hide these operating costs in an overhead account or as general expenses can result in accounting violations.
Variable equipment operating costs include any specific expenditure necessary to run the equipment. Examples can be utilities, maintenance, fuel for vehicles, or any item necessary to keep the equipment running smoothly. In most cases, labor to operate the equipment falls under a separate cost category. Variable costs can be more dangerous during actual production as these costs can quickly spiral out of control. For example, rising variable prices with no hopes of increased income will reduce a company’s overall profit expectations.
Not all equipment operating costs are the same. Each company may operate the equipment differently or have different setups, which will alter the cost structure greatly. With this in mind, accountants need to create an individualized system that captures all costs accordingly. Failure to do so will result in mixed-up costs and improper reports prepared from poor accounting data.
