Operating expense

“ There is nothing in the findings to suggest that cost of any improvement made by lessee was rent or an expenditure not properly to be attributed to its capital or maintenance account as distinguished from operating expense. While the lease required it to make improvements necessary for successful operation, no item was specified, nor the time or amount of any expenditure. ”

“ You cannot say that one is an operating expense and the other is an item which need not be ascertained nor taken into account until the net profit is shown.... If the provision for depreciation is an item which cannot be included among the costs of operation, there is something wrong. ”

“ Finally, there are the hosts of miscellaneous items of operating expenses in which we must be led to expect saving by all other experience in consolidating similar agencies performing similar services. Some of these expenses might even be eliminated entirely under Government ownership and control. Such are the cost of superintendence and auditing, insurance, the cost of securing traffic commissions, advertising and law expenses, to say nothing of the profits paid stockholders in normal years. ”

“ Several years are usually required before they obtain a sufficient amount of business or earnings to cover operating expenses, including depreciation and a reasonable rate of interest upon the investment. The amount by which the earnings fail to meet these requirements may thus be regarded as deficits from the operation. These deficits constitute the cost of building up the business of the plant. They are as much a part of the cost of building up the business as loss of interest during the construction of the plant is a part of the cost of its construction. ”

“ When a public utility chooses to pay out a large part of its 'operating expenses' to corporate associates, affiliates, etc., these payments might conceivably be used to drain the operating company's income and to inflate the 'operating expenses.' Inflated operating expenses inevitably lead to inflated rates. Since affiliates, associates, etc., do not ordinarily deal at 'arm's length,' appellant had the burden of proving the fairness and reasonableness of all expenditures made or charged as inter-company transactions. ”

“ Amounts sufficient to create a reserve balance that is the same percentage of total cost of depreciable items as their age is of their total service life cannot be accepted as legitimate additions to operating expenses. ”

“ If ye keep your expenses as at present, and increase your sales, all the profit on the excess business above your quota is porridge. Ye dinna hae to pay any additional amount for rent, taxes, heat, light, depreciation, advertising, or insurance. In other wor-rds, your operating expenses on all business, over and above your sales quota, are reduced by these items. This saving would reduce your operating expenses eight per cent., meaning that this excess business over your quota would only cost ye twelve per cent. to secure, instead o' twenty per cent. ”

“ If the property is not earning a sufficient sum to pay its operating expenses, and taxes, and to set aside a fund to cover depreciation and obsolescence, there is clearly no intangible value of any sort to be added to the physical value. If, however, after all these charges are taken care of, there is a net earning which is large enough to pay 4 or 5% on the physical property and still leave a surplus, is it not perfectly reasonable and proper to hold that this surplus represents earnings on all intangible elements of value? ”

“ Such expenses need not relate directly to the production of income for the business. It is enough that the expense, if 'ordinary and necessary,' is directly connected with or proximately results from the conduct of the business. ”

“ If an expense is capital, it cannot be deducted as 'ordinary and necessary,' either as a business expense under § 162 of the Code or as an expense of 'management, conservation, or maintenance' under § 212. ”

“ It is very vital that a clear line of demarcation be maintained between capital and revenue expenditures—that great care be exercised that no cost is charged into the asset group of accounts unless such cost really enhances the worth of an asset. A cost incurred for the purpose of maintaining the value of the asset is an expense charge, and repairs and maintenance charges must be very carefully distinguished from replacements. ”

“ Obviously what is an ordinary expense of a given business must depend upon the nature and scope of the business, the nature and occasion of the expenditure, and other considerations which will emerge in each specific case. ”

“ The service may be, and often is, one that the taxpayer could not perform for itself, but if it is hired to build up its business, I see no reason why its proper cost is not a business expense deduction. ”

“ In a small plant, where the selling division is conducted through the general office at an expense so small as not to affect the cost of administration over what would be necessary for manufacturing purposes only, or where there is difficulty in separating the selling from the manufacturing expense, the two are often combined as general expense and pro-rated as one account into production costs. ”

“ If cost accounting by departments is determined upon, it becomes necessary to carry the departmental analysis beyond the gross profit stage, in which case building expense must be taken account of and spread equitably over the various departments. Likewise, within the factory it may be desirable to allocate the item of building expense over the various departments of storeskeeping, costing, and production proper, and even a further analysis may be necessary depending somewhat on the detailed information desired. ”

“ The cost of production includes the cost of material, labor, and expense. It is necessary, therefore, to keep an accurate record of material and supplies issued to the factory, just as is done in factories manufacturing goods on special orders. Labor costs should be recorded by departments, and the distribution of expense should be by departments, as far as possible. ”

“ Under petitioner's interpretation, the fundamental question whether an expense is properly characterized as a capital outlay which has to be amortized or instead as an ordinary business expense subject to immediate deduction would be answered by simple reference to accounting procedures in the industry. ”

“ For example, when the cost of placing the asset in efficient condition for operation is less than, say, $100, it is charged as repair cost and therefore does not increase the book value of the asset. If the cost exceeds $100, an analysis is made to determine what portion of it, if any, increases the value of the asset. The amount of the betterment is of course a charge to the asset account, while the rest of it is a charge to some expense account. ”

“ As we have said, every presumption is in favor of the legitimate exercise of the rate-making power, and it is not to be presumed, without proof, that a company is under the necessity of making up losses and expenditures incidental to the experimental stage of its business.
These items of expense in development are often called overhead charges, for which, as we have already seen, the master allowed 15 per cent upon the base value (exclusive of real estate) or $296,254, in addition to his allowance of $6,923 for organization expenses. ”

“ General indirect labor and general expense is added to the combined total of all shop costs. In this connection it may be well to emphasize the importance of distributing every expense possible to individual shops, leaving only those items that cannot be so distributed to be added as general expense. For the ostensible purpose of reducing labor, it is the practice of some accountants to throw all expense items into one class, adding the whole as general expense. ”

“ Direct costs are sometimes called prime costs. The cost elements which can almost invariably be applied directly to the product are material and labor. The sum of these two items constitute, therefore, the prime or first cost of the product. The other items of cost which are incurred in the factory or with which the factory is chargeable are variously called factory expense, overhead, or burden. These indirect costs cannot be charged directly to any specific product, and so they are shared by the entire factory output. ”

“ United States, supra, touching the market agencies at the Omaha stockyards. Little capital is invested; the business is the rendering of personal services for which charges are made according to a uniform schedule. In ascertaining whether the rates are reasonable, the prime factor is the agencies' costs, of which the most important are salesemen's compensation and the expense of getting and maintaining business. ”

“ Under Appropriations, enter all disbursements voted by the Exchange Council for Athletics, Dividends, Sick in Hospital, etc. Under Fixtures should go all expenditures for permanent equipment (new) of the Exchange, and under Maintenance, all money spent for repairs, replacing of old equipment by new, and the like. In the Expense Column we carry such items as wastage, breakage, telephone and telegraph bills, fuel, light, insurance, printing and stationery, and such expendable supplies as twine, paper, etc., as are used in carrying on the business. ”

“ In the case of a policy of guaranteeing the quality of a product or its workmanship, after a few years’ experience very accurate estimates can be made of the loss to be expected therefrom, and at the end of a fiscal period the books can be adjusted on that basis just as they are for taxes. A charge to a suitable expense account and a credit to a reserve or accrued account comprises the book entry, with a listing of the reserve as a real liability. ”

“ When the manufacture requires operations in several shops, one of these forms is used for each shop on each production order—that is, a form for each separate shop order. When the job is finished, the costs for all shops are assembled on one form to obtain the total cost of the job.
Fig. 13. Recapitulation of Departmental Labor and Material Costs
The total material and direct labor costs are brought down on this form, but indirect labor and shop expense are added as a percentage, as has been described in the discussion of expense distribution. ”

“ The amount of all expenses, Including interest and salaries, is ascertained, and the total net profits shall be divided between the firm and the employés sharing in the fund. The amount of the net profit to be distributed will be that proportion of the whole net profit which will correspond to the proportion of the wages paid as compared with the entire cost of production and the expense of the business. ”

“ Accounting for financial management and accounting for federal income tax purposes both focus on the need for an accurate determination of the net income from operations of a given business for a fiscal period. The approach taken by the Commissioner computes depreciation expense in a manner which is far more likely to reflect correctly the actual cost over the years in which the asset is employed in the business. ”

“ Commercial costs which are not chargeable to sales are classed as administrative, and may be divided into executive, accounting, office expense, credits, and collections.
In a strictly trading business, purchasing is an added division, while in a manufacturing enterprise it is usual to consider this a manufacturing expense.
Executive expense is made up of the salaries of the general manager and comptroller, salaries of clerks and stenographers, and a proper portion of miscellaneous expense. In a manufacturing business, a part of the executive salaries is charged to manufacturing. ”

“ Organization expenses are therefore, from the standpoint of classification, best treated as an intangible asset rather than as a deferred or prepaid expense. In strict theory the value of these costs will last as long as the corporate existence. In Italy where corporate life is limited to fifty years, it is prescribed that organization [Pg 331] costs be prorated over the full life of the corporation. The best practice in this country requires a much more rapid writing off of these items ”

“ Accordingly, corporations oftentimes spend large sums in so-called social betterment work, and it is customary for the corporation to charge a fair rental on workmen’s dwellings. The expense in connection with such work is to be treated rather as an item of extraordinary expense just as the income from the corporation’s investment in workmen’s dwellings must be treated as income outside the regular operations of the business. The problem here is simply the determination of the proper place to show the items of expense and income in the profit and loss summary for the period. ”

“ Organization Expense. The group of expenditures explained in Chapter XXXVIII, as incident to the organization of a corporation, is recorded under the title “Organization Expenses” and is classified for purposes of the balance sheet as an asset. It is a kind of asset, however, which has no [Pg 407] tangible value and most businesses desire to consider it more in the nature of a deferred charge to operations. It is recognized that frequently intangible assets add no strength to the business. ”

“ If in estimating profits we sometimes include a return for the use of capital, it is from incomplete analysis of the forces in use, since the interest upon capital can easily be separated in all actual practice, and in most enterprises is counted as a distinct expense to be provided for in entering upon the undertaking. The profits really belong to the management of any undertaking, as return for the exertion in that management. In every-day use the term wages is applied only to the stipulated amount paid from time to time for services rendered to another. ”