Expenditure Excluded from cost

Expenditure Excluded from cost

Such items as income tax, cost of fixing new plant (except for a specific job), bonuses to employees voted at an annual meeting (being an apportionment of profit), dividends, cannot be included as items of cost. Various kinds of expenses connected with financing, and exceptional losses such as abnormal waste and abnormal loss, are ordinarily also excluded. Some exclude cash discounts received and allowed; and again, while bad debts are included in selling overhead by some accountants, others exclude them.

It is usual to exclude large abnormal losses such as, for example, obsolescence. Obsolescence is the process by which an asset loses its value by falling into disuse, other than by wear and tear. The term is generally used to indicate loss of value when, say, a machine or building is discarded before the expiration of its normal life, usually because of its inability to compete with one better adapted or of more modern type. There is a sudden, rather than gradual, diminution in value. If plant is scrapped before the original costs of plant and fixing have all been written off, the balance of the capital value is therefore transferred to obsolescence account, and from thence at the end of the year it is written off to profit and loss account.

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