Expenses by Function
“Expenses by Function” is a way of categorizing a company’s expenses based on the different areas or functions within the company where these expenses occur. This method allows a company to track and manage its costs more effectively by seeing how much is being spent on each function.
Here are some common functions in a business where expenses might be incurred:
- Cost of Goods Sold (COGS): This is the cost of producing the goods or services that a company sells. It includes the cost of materials and direct labor costs.
- Sales and Marketing: This includes all expenses related to promoting and selling products or services. It could be the cost of advertising, sales commissions, promotional materials, etc.
- Research and Development (R&D): This includes the costs of developing new products or services or improving existing ones. This can involve salaries of research staff, cost of research materials and equipment, etc.
- General and Administrative (G&A): These are the overhead costs of running the business and not directly tied to a specific function in the company. This could include salaries of executive and administrative personnel, office rent, utilities, office supplies, etc.
- Operations: This includes the costs associated with the operation and maintenance of the business outside of direct production costs. It might include costs related to logistics, warehousing, equipment maintenance, etc.
By breaking down expenses by function, a company can gain a better understanding of how its resources are being used, which can inform strategic planning and budgeting decisions. This information can also be helpful to investors and analysts when evaluating a company’s performance and efficiency.
Example of Expenses by Function
Let’s take an example of a hypothetical manufacturing company to illustrate how “Expenses by Function” might look:
| Function | Expense | Cost ($) |
|---|---|---|
| Cost of Goods Sold (COGS) | Raw Materials | 500,000 |
| Labor | 200,000 | |
| Sales & Marketing | Advertising | 100,000 |
| Sales Commissions | 50,000 | |
| Research & Development (R&D) | Research Materials | 80,000 |
| Salaries of Research Staff | 120,000 | |
| General & Administrative (G&A) | Executive Salaries | 200,000 |
| Office Rent | 60,000 | |
| Operations | Equipment Maintenance | 30,000 |
| Logistics | 40,000 |
By breaking down its expenses this way, the company can clearly see where its money is going. For example, it can see that the largest chunk of expenses is going toward COGS, mainly for raw materials. This could lead the company to investigate whether it can reduce these costs by finding cheaper suppliers or improving efficiency.
On the other hand, it can also see that it’s spending a significant amount on R&D. If this leads to the development of profitable new products, this could be seen as a good investment. However, if the R&D expenses are not producing results, the company might decide to cut back in this area.
Therefore, classifying expenses by function helps companies make more informed decisions about how to allocate resources and improve profitability.
