Capital Costs

(noun)

Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. Put simply, it is the total cost needed to bring a project to a commercially operable status.

Examples of Capital Costs in the following topics:

  • Accounting Perspectives on Long-Lived Assets

    • All money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
    • The basic rule here is that—when recognizing the asset is allowed—all money that is spent to get the asset up and running is capitalized as part as the cost of the asset.
    • Items that can be capitalized when the firm purchases a machine include the machine itself, transportation, getting the machine in place, fees paid for having the machine installed and tested, the cost of a trial run, and alike.
    • Examples that are excluded from the asset, and consequently are expense rather than capital costs, include the training of personnel to learn how to use the machine, unexpected damages while installing the machine, or the drinks and snacks to celebrate the machine's successful launch.
    • Items spent to get the asset up and running is capitalized as part as the cost of the asset.

  • Cost of Interest During Construction

    • The amount of interest cost incurred and/or paid during an asset's construction phase is part of an asset's cost on the balance sheet.
    • The capitalization of interest costs involves adding the amount of interest expense incurred and/or paid during the asset's construction phase to the asset's cost recorded on the balance sheet.
    • Interest cost capitalization does not apply to retail inventory constructed or held for sale purposes.
    • If any delays occur during the construction phase, the interest costs incurred during the delay are not capitalized.
    • When the asset's construction is complete and the asset is ready for use, any additional interest expense incurred is no longer capitalized as part of the asset's cost.

  • Cost of Improvements

    • The cost of an asset improvement is capitalized and added to the asset's historical cost on the balance sheet.
    • The cost of the improvement is capitalized and added to the asset's historical cost on the balance sheet.
    • If the capital improvement is financed, the interest cost associated with the improvement should not be capitalized as an addition to the asset's historical cost.
    • Interest costs are not capitalized for assets that are not under construction.
    • When the cost of a capital improvement is capitalized, the asset's historical cost increases and periodic depreciation expense will increase.

  • Reporting R&D Cost

    • Expense R&D, unless items have alternative future uses, then allocate as consumed, or capitalize and depreciate as used.
    • A cost which cannot be deducted in the year in which it is paid or incurred must be capitalized.
    • The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized.
    • The capital expenditure costs are then amortized or depreciated over the life of the asset.
    • The costs associated with R&D activities and the accounting treatment accorded them are as follows: expense the entire costs, unless the items have alternative future uses (in other R&D projects or otherwise), then carry as inventory and allocate as consumed, or capitalize and depreciate as used.

  • Analyzing Intangible Assets

    • Some costs with respect to intangible assets must be capitalized rather than treated as deductible expenses.
    • Treasury regulations generally require capitalization of costs associated with acquiring, creating, or enhancing intangible assets.
    • For example, an amount paid to obtain a trademark must be capitalized.
    • Certain amounts paid to facilitate these transactions are also capitalized.
    • Research and development (R&D) costs are not in and of themselves intangible assets.

  • Accounting for R&D Activity

    • Prior to 1975, businesses often capitalized research and development costs as intangible assets when future benefits were expected from their incurrence.
    • Other companies capitalized those costs that related to proven products and expensed the rest as incurred.
    • Administrative costs are non-manufacturing costs that include the costs of top administrative functions and various staff departments such as accounting, data processing, and personnel.
    • Executive salaries, clerical salaries, office expenses, office rent, donations, research and development costs, and legal costs are also administrative costs.
    • As with selling costs, all organizations have administrative costs.

  • Working Capital Management Analysis

    • Along with fixed assets, such as property, plant, and equipment, working capital is considered a part of operating capital.
    • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit.
    • Decisions relating to working capital and short term financing are referred to as working capital management.
    • This metric is determined by dividing relevant income for the 12 months by the cost of capital used.
    • When ROC exceeds the cost of capital, firm value is enhanced and profits are expected in the short term.

  • Cost of Goods Sold and Gross Profit

    • Cost of goods sold refers to the inventory costs of the goods a business has sold during a particular period.
    • Costs are associated with particular goods by using one of several formulas, including specific identification, first-in-first-out (FIFO), or average cost.
    • Costs include all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.
    • The costs of those goods not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
    • When the goods are bought or produced, the costs associated with such goods are capitalized as part of inventory (or stock) of goods.

  • Accounting Methodologies: Amortized Cost, Fair Value, and Equity

    • Due to different durations of holding and other factors, companies use several accounting methodologies, including amortized cost, fair value, and equity.
    • Held to maturity securities are reported at amortized cost less impairment.
    • subjective factors such as risk characteristics, cost of and return on capital and individually perceived utility.
    • Explain the difference between amortized cost, fair value and the equity method for reporting debt securities

  • Valuing Repairs, Maintenance, and Additions

    • Improvements to existing plant assets are capital expenditures because they increase the quality of services obtained from the asset.
    • If an expenditure that should be expensed is capitalized, the effects are more significant.
    • The company capitalized the USD 6,000 that should have been charged to repairs expense in 2010.
    • Such contingent liabilities can be estimated reliably based on historical cost and readily available information.
    • Explain what a capital expenditure is and how a company would account for it.