Question

If I bought some equipment that should be replaced in ten years, I understand each of those years are fixed costs. However, if the equipment needs maintenance or repairs during that time are the repairs variable costs or how are they classified? Please explain….thanks.

Answer 1

1. As per Costing Principles, the total costs of the business can be classified into fixed cost and variable cost based on the production output .

2. Cost which does not change with increase or decrease in output is classified as fixed cost. Ex : Rent, Depreciation, Salaries, Insurance . Costs which changes with the change in output is classified as variable cost. Ex: electricity expense, cost of raw materials.

3. As per Accounting principles, expenditure of the business can be classified as capital expenditure or revenue expenditure.

4. Expenditure incurred for acquiring an asset or improving its useful life or capacity can be classified as capital expenditure. Expenditure incurred in day to day routine business operations can be classified as revenue expenditure. Capital expenditure improves the earning capacity of business while revenue expenditure is incurred to maintain that capacity.

5. Based on above discussion It is more appropriate to classify purchase of equipment as capital expenditure. Depreciation on equipment can be classified as fixed cost. Equipment is an asset which is used in producing output. It should be capitalised. We cant say it as fixed cost.

6. If equipment needs repairs and maintenance during its operational period , repairs and maintenace expenditure can be classifed as follows based on the nature of the expense :

(a) If expenses are incurred for general maintenance and operation of equipment during day to day activities it can be classified as revenue expenditure.

This expenditure can be classified as variable cost because repairs increases as output increases.

In some cases repairs and maintenance can be classified as semi variable cost. For example: At regular intervals company may incur fixed preventative maintenance cost which can reduce frequent repairs . This cost is fixed. At the same time repairs will be incurred during operation of equipment. These repairs increase as output increases. This is variable component. So there is fixed as well as variable component in this case. This can be classified as semi variable cost.

(b) If maintenance and repairs will increase the useful life of the equipment or its capacity we can capitalise this expenditure.