Running Costs

Running Costs Fixed Assets Operational Expenses Maintenance Business Costs Consumables
The expenditure incurred in order to carry out the operations of a fixed asset. Examples are power, maintenance, and consumable materials for a machine or fuel, oil, tires, and servicing for motor vehicles.
On this page

Definition

Running costs refer to the continual expenditure required to operate, maintain, and ensure the proper functioning of a fixed asset. These costs are essential for the asset to generate output over its useful life. Examples of running costs include power, maintenance, consumable materials for machinery, and fuel, oil, tires, and servicing for motor vehicles.

Examples

  1. Manufacturing Equipment:

    • Power: The electricity needed to run the machines.
    • Maintenance: Regular servicing to prevent breakdowns and prolong the life of the equipment.
    • Consumable Materials: Lubricants, oils, and other materials required for the smooth operation of machinery.

  2. Motor Vehicles:

    • Fuel: The costs associated with the fuel consumed by vehicles.
    • Oil: Regular oil changes to ensure engine efficiency.
    • Tires: Replacement and maintenance of tires.
    • Servicing: Routine checks and maintenance to keep the vehicle operational.

Frequently Asked Questions (FAQs)

Q1: What differentiates running costs from capital expenditures?

  • A1: Running costs are ongoing operational expenses required to keep a fixed asset functioning, while capital expenditures (CAPEX) are funds used to acquire or upgrade physical assets such as property, industrial buildings, or equipment.

Q2: Why are running costs important for a business?

  • A2: Running costs are crucial for budget planning and financial forecasting. They are instrumental in determining the total cost of ownership of a fixed asset and impact the profitability and operational efficiency of a business.

Q3: How can businesses manage running costs?

  • A3: Businesses can manage running costs through regular maintenance schedules, energy-efficient practices, bulk purchasing of consumables, and employing cost-effective technologies.

Q4: Are running costs deductible for tax purposes?

  • A4: Yes, running costs are generally deductible as business expenses. They reduce the taxable income and overall tax liability of the business.

  1. Capital Expenditures (CAPEX):

    • Funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.

  2. Operational Expenses (OPEX):

    • The ongoing costs for running a product, business, or system which include day-to-day expenses.

  3. Depreciation:

    • The allocation of the cost of a tangible asset over its useful life.

  4. Fixed Asset:

    • Long-term tangible assets that a firm owns and uses in its operations to generate income.

Online Resources

  1. Investopedia: Understanding Operating Costs
  2. The Balance Small Business: Operating Costs Definition
  3. Corporate Finance Institute: What are Operating Expenses?

Suggested Books for Further Studies

  1. “Financial and Management Accounting: An Introduction” by Pauline Weetman
  2. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
  3. “Accounting for Non-Accountants: The Fast and Easy Way to Learn the Basics” by Wayne A. Label.
  4. “Principles of Managerial Finance” by Lawrence J. Gitman and Chad J. Zutter

Accounting Basics: “Running Costs” Fundamentals Quiz

### Which of the following is considered a running cost for machinery? - [x] Consumable materials - [ ] Purchase price of the machinery - [ ] Installation fees - [ ] Sales tax > **Explanation:** Consumable materials like lubricants and oils needed for machinery operation are considered running costs. Purchase price and installation fees are capital expenditures. ### What type of expense does fuel for a company's delivery trucks fall under? - [ ] Fixed expenses - [x] Running costs - [ ] Capital expenditures - [ ] Overhead costs > **Explanation:** Fuel for company vehicles is a running cost as it is required for the continuous operation of the vehicles. ### How do running costs affect a company's profitability? - [x] They reduce overall profitability by adding to operational expenses. - [ ] They increase profitability by lowering taxable income. - [ ] They do not affect profitability. - [ ] They are offset by capital gains. > **Explanation:** Running costs add to operational expenses and reduce the overall profitability of a business. ### Which of the following is a strategy to manage running costs efficiently? - [x] Regular maintenance schedules - [ ] Skipping routine servicing - [ ] Ignoring energy efficiency - [ ] Delaying repair works > **Explanation:** Implementing regular maintenance schedules helps in managing running costs by preventing major breakdowns and improving efficiency. ### Are running costs tax-deductible? - [x] Yes, they are generally deductible as business expenses. - [ ] No, they are capital expenditures. - [ ] Only under specific criteria. - [ ] Only for the first year of operation. > **Explanation:** Running costs are operational expenses and are usually tax-deductible, helping to reduce taxable income. ### What differentiates running costs from capital expenditures? - [ ] Running costs involve acquisition of assets. - [x] Running costs are for operational maintenance, CAPEX for acquiring/upgrading assets. - [ ] Running costs are always lower than CAPEX. - [ ] They are interchangeable terms. > **Explanation:** Running costs are ongoing expenses for maintenance, whereas capital expenditures are used for acquiring or upgrading assets. ### Is the expense for regular oil changes for company vehicles considered a running cost? - [x] Yes - [ ] No - [ ] Only if it exceeds a certain amount - [ ] Only in certain industries > **Explanation:** Regular oil changes for company vehicles are considered running costs as they are needed for the continuous operation of the vehicles. ### Which of the following describes a fixed asset? - [ ] Consumable material - [ ] Fuel for vehicles - [ ] Factory electricity bill - [x] Manufacturing equipment > **Explanation:** Manufacturing equipment is considered a fixed asset used in business operations to generate income. ### What is the impact of neglecting maintenance on running costs? - [ ] Neglecting maintenance reduces running costs. - [x] Neglecting maintenance increases future costs due to unnecessary breakdowns. - [ ] Running costs remain unaffected. - [ ] It leads to an immediate increase in capital expenditures instead. > **Explanation:** Neglecting maintenance can lead to increased future costs and breakdowns, thus increasing running costs. ### Over time, what tends to happen to the running costs of older equipment? - [ ] Decrease due to depreciation - [ ] Stay the same - [x] Increase due to higher maintenance needs - [ ] Disappear after initial usage > **Explanation:** As equipment ages, running costs often increase due to the higher maintenance and repairs needed to keep the equipment operational.
Tuesday, August 6, 2024
Running Yield
Rundown

Accounting Terms Lexicon

Discover comprehensive accounting definitions and practical insights. Empowering students and professionals with clear and concise explanations for a better understanding of financial terms.