About the Download

COST, CAPITALIZATION, & EXPENSE
As an organization it is always important to continuously evaluate operations to see
where improvements can be made and how to further maximize profitability. This is true for all
organizations, including Subway. The Subway where I am currently employed is the only one in
the local vicinity. The location has been open for approximately five years and has seen steady
growth in both foot traffic as well as sales. Therefore, it is my recommendation that the owner
open another location on the other side of town. Current sales numbers indicate that there would
be enough consumer demand to maintain both locations.
Undertaking such a project will require funding. In order to ensure there is enough capital
to cover the cost, an estimate must be made of the initial costs that will be incurred. Because the
Subway restaurant is a franchise, there are specific requirements as established by Subway that
must be followed. Such requirements include subleasing the property from the company its self,
leasing equipment required for operation, purchasing inventory from only their vendors, and the
payment of royalties for using the Subway brand. The cost estimate and breakdown show that it
will take approximately $184,250 to open the second location (see Figure 1.1).
This estimate includes the various requirements Subway places upon all franchisees,
excluding the cost of the training and testing typically required before opening a franchise, as the
owner has already passed this test, has been in operation, and has maintained organizational
standards. Opening a new location will require a new building, whether it is new construction or
an existing building. Additionally, new equipment will also be needed. However, based upon
franchise requirements, the owner will have to sublease the property and lease the equipment
from Subway. This limits the amount of assets of the owner, but still provides him with the
COST, CAPITALIZATION, & EXPENSE
necessary tools to make the new franchise and location successful.
While there are costs involved in opening a new location, some costs may be treated
differently than others. In other words, some costs will be expensed, while other costs will be
capitalized. The treatment applied to the costs is dependent upon how the cost is incurred by the
organization. Expensed costs are those costs that are spent and consumed immediately by the
organization. For instance, the initial franchise fee required by Subway would be considered an
expensed cost. This is because it is money spent and consumed immediately.
Capitalized cost on the other hand is when a cost contributes to the capital of the
organization and the cost is consumed over a period of time (Pratt, 2011). For instance, the
additional capital Subway requires the owner to hold would be considered a capitalized cost.
This is because the owner must be able to show that the money is there, but it is not being spent
immediately and will instead be spent over time. Another example of a capitalized cost includes
insurance. If the owner pays $1,500 in January for three months coverage, then at the beginning
of January the $1,500 would be a capitalized cost. However, in February the capitalized costs
would decrease to $1,000, as the payment for January coverage was consumed. Capitalized costs
are also costs that can be amortized through depreciation of the good that was purchased.
How a cost is recorded and whether it is treated as an expensed cost or a capitalized
cost can have a major impact upon an organization. Expensed costs mean that the money has
been spent by the organization. These costs are simply seen as an expense, as they take from
the revenues generated by an organization. However, capitalized costs have a different impact
upon an organization. Capitalized costs add value to the organization. They typically add to
the assets of the organization while they capitalized. For instance, if the owner were able to
COST, CAPITALIZATION, & EXPENSE
purchase his own equipment it would be considered a capitalized cost. While there would be
initial expenditure, the value of the equipment would be added to the assets of the organization
and would only decrease by the amount the equipment depreciated each year. Increasing assets
contributes to a greater quick ratio. The quick ratio shows the organization’s ability to pay off
their liabilities or debt. This can be pivotal information when trying to secure funding for further
growth or improvement in the future of the organization. However, it is important to note that
the capitalized costs of an organization are in constant fluctuation as assets depreciate and costs,
such as prepaid insurance, are consumed.
Understanding costs and how they are consumed are important factors when determining
whether a project should be pursued. Looking at the cost estimate of opening a new location, it
is seen that approximately 71 percent of the costs are expensed costs. Meanwhile, most of the
capitalized costs of the project are costs that will be consumed within a short period of time,
leaving little value or contribution to the owner’s assets after the initial three-month period
the cost estimate is based on. Therefore, while there may be enough demand to open another
location, the owner will need to decide whether they are comfortable with taking on that much
expensed costs to do so.
COST, CAPITALIZATION, & EXPENSE
Figure 1.1.
 

Save For Later

has been added to your cart!

have been added to your cart!

You must log in and be a buyer of this download to submit a review.