Investment expenditures

From CEOpedia | Management online
Investment expenditures
See also

The expenditures are the deliberate consumption of production factors in a given production process in connection with the company's business. It ranges the entire economic entity. Outlay can be expressed in natural units, which means that it is not unaffiliated to aggregation, as well as in currency.

Division of expenditure

  • due to wear time:
  1. Numbered list item
  2. current - which are consumed in a unit of time (e.g. 1 production cycle, 1 year)
  3. investment - which is consumed and bringing production effects after a long time
  • due to its intended use:
  1. capital - high-value expenditures allocated for the purchase or improvement of a fixed asset (land and buildings, machinery and equipment, investments in subsidiaries)
  2. for fixed assets - mainly investments in industry and construction

Gross capital investments include the total sum of investments in a given period, while net investments contain the expected decrease in the value of capital as well.

  • due to the type:
  1. material (material consumption in m, pcs, kg)
  2. means of work (working time of machines in machine hours)
  3. work of hands (expressed in man-hours)
  4. cash (consumption of monetary resources recognized in monetary units)

Investment in innovation

Investment in innovation constitutes a large part of the whole outlay. Examples of such are:

  • research and development (R&D) related to the development of new and improved products (product innovations) and processes (process innovations), carried out by own development facilities (so-called internal expenditure) or purchased from other entities (so-called external expenditure),
  • purchase of ready technology in the form of documentation and rights (licenses, patent rights, disclosure of know-how, etc.),

software [purchase, development (improvement) and adaptation are included],

  • purchase and assembly of machinery and equipment as well as the construction, extension and modernization of buildings that serve the implementation of innovations,
  • in-house staff training related to innovation, from the design phase to the marketing phase;
  • both investment in the acquisition of external training services as well as investment in in-house training, these may be e.g. costs of training staff in using computers in a way related to introduced innovations, etc.,
  • marketing of new and improved products, i.e. investment in preliminary market research, market tests, adapting products to the requirements of various markets, advertising, etc., excluding expenditure on the organization of distribution networks for new products,
  • other preparations for the introduction of technical innovations, including in particular the development of procedures (including quality control), standards, technical documentation (specifications), including final tests.

Outlay-cost relationship

As mentioned earlier, outlay can be expressed in monetary units. Some investments are measured mainly is money; these can be immediately called costs. They are e.g.

  • cost-taxes
  • social security contributions
  • property insurance

The input is converted into cost also when as a result of the input consumption a useful effect arises, i.e. a product that meets certain conditions (having a value in use for the buyer). This cost is a measure of the value of the product, it can be counted into product pricing as well. If in given technical and organizational conditions, the consumption exceeds the necessary level, it becomes a loss that will have to be covered.

The cost is only that part of the effort that has been intentionally rosed for a specific business.

Therefore it can be concluded that outlay is a broader concept than cost.

Outlay-expenditure relationship

The formation of outlays is contingent upon the expenses incurred by the enterprise. Remember:

  • not every cost does equal outlay
  • not all expenditure requires rising of the cost
  • outlays corresponding to the short-term cost incurred are not the same in terms of both amount and time; the longer the time interval lasts, the smaller the differences between the entity's inputs, costs and expenses are.

By definition, in the long run, all expenditures are variable.

The function of production

By analyzing the concept of inputs, it can be slightly expanded so it is referring to the function of production. It shows the maximum production volume that can be obtained from given inputs.

Outlays can be used in fixed proportions or they can be substitutable to each other. In the second situation presented, following the principle of maximizing profit, the cheapest combination of inputs should be used to obtain a certain volume of production.