Expense of Fixed Assets
When an asset is purchased, the value of the asset is not only its purchase price, but also the necessary expenses that follow the purchase. These expenditures are known as the expenses of fixed assets, or costs to maintain or use fixed assets.
Typically, the expenses of fixed assets are broken down into three broad categories: operating costs, capital expenditures, and depreciation costs. Operating costs include the day-to-day or recurring expenses needed to keep a fixed asset running, such as fuel and maintenance expenses. Capital expenditures are expenses incurred when the asset is first purchased, such as installation and related fees. Finally, depreciation costs attempt to spread out the total cost of a fixed asset over its useful life.
The three types of expenses associated with fixed assets are important to businesses for different reasons. For example, operating costs are obvious and necessary for businesses to track for budgeting and financial planning purposes. Capital expenditures, meanwhile, should be tracked and monitored to ensure that the purchase of an asset proves to be a sound financial decision. Lastly, depreciation costs are an important factor in budgeting and are used to track tax deductions that a business can take.
In terms of calculating the total cost of an asset, the expense of fixed assets must also be considered alongside the purchase price of the asset. Generally, businesses use the total cost of an asset as the basis for their return on investment (ROI) calculations. The ROI is essentially the amount of money a business earns in relation to the money that was invested in the asset, and it is calculated by dividing the assets total cost (purchase price plus expense of fixed assets) by the revenue that is generated by the asset.
The expense of fixed assets also plays an important role in the capital budgeting process that businesses use to identify projects with the highest potential value. These expenses are considered as part of the cost to acquire the asset and must be subtracted from the expected future benefits of an asset to accurately determine if a project will have a positive return on investment.
In conclusion, the expense of fixed assets represents an important part of any financial or budgeting plan because these costs can significantly add up to the overall cost of ownership of an asset. By accounting for the expense of fixed assets, businesses can more accurately measure the ROI of their investments, as well as accurately assess the potential level of value that any proposed capital project could provide.
