When a company invests millions of dollars into its infrastructure to enable it to produce products or services, the company expects to produce a profit from the investment. In order for managers to measure the profit produced, several different methods are commonly used to determine to the profit. In any case or method to calculate profit, one needs to know cost.
Generally, it is fairly easy to determine the income from a product. Knowing cost is entirely different for a manufacturer or service provider. The first question that we raise is "What is Cost?"
Here is what Wikipedia, the free encyclopedia, says about CAPEX.
Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. CAPEX are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account ("capitalized"), thus increasing the asset's basis (the cost or value of an asset as adjusted for tax purposes). CAPEX is commonly found on the Cash Flow Statement as "Investment in Plant Property and Equipment" or something similar in the Investing subsection.
Our view of CAPEX supports this definition but "Cost" can have many different meanings. It can mean different things to different people. The true meaning of "Cost" often gets lost in the impreciseness of the English language. A few of the many types of "Cost" that are sometimes incorrectly used interchangeably are:
- Depreciation Cost for tax purposes
- Original Cost
- Ownership Cost
- Operation Cost
- Historic Cost
- This Years Cost
- Last Year's Cost
- Estimated or Projected Cost
- Budgeted Cost
- Life Cycle Cost
- Dynamic Life Cycle Cost
- Activity Based Costing (ABC)
When applied against income each of these will produce a very different calculation of profit.
If you are looking for a better way to know your true CAPEX Cost, we may be able to help you. Decisive Systems has developed specially designed software tools to help you to know your cost.
These systems are designed to help you get to true product cost. We take into account items that are often overlooked.
The true cost of a product or service is a moving target. Without understanding the understanding the reasons for volitility and the range of volatility over long time periods of five, ten or even twenty years, true cost cannot be known.
Treating costs as a fixed or even semi-fixed expense will very often results in inaccurate costs due to its variability. This is especially true when cost is used to forecast, budget or in job or product costing systems. Inaccuracy in costing often results in confusion, non-comparable results, reduced ability to control product or process costs.
We say that: "All cost reduction first begins with knowing cost."
A better costing method is Dynamic Life Cycle Costing. Often when one looks closely at what makes up “Investment in Plant Property and Equipment”, you will see not one lifetime or cost cycle, many cost cycles over time. Most every piece of large equipment or process contains hundreds or even thousands of components. Each of these components has an ownership life cycle and often associated operating cost. The complexity often makes cost appear as seemingly impossible to know.
Dynamic Life Cycle Costing draws from both life cycle costing techniques and ABC or activity based costing. This form of cost recognizes that cost is combination of certain fixed and variable costs and brings them together in a cost that allows you to easily determine product cost per ton or any other unit of measure.Our specialty is to help you to determine which costing method is best for your facility and then help you to determine how to cost what is important.
Call Dan Rooks
Decisive Systems, Inc
941-926-9260