92 5.1 Capital Equipment

Objectives

By the end of this section, you should be able to:

1.  Identify the characteristics of capital equipment.

2.  Explain the differences between materials procurement and capital equipment procurement.

3.  Discuss the role procurement play in capital equipment acquisitions.

4.  Make decisions on new-versus-used for equipment procurement.

Introduction

Capital equipment has been defined as one of the subclass of the fixed asset category that includes industrial and office machinery and tools, transportation equipment, furniture and others. As such, these items are properly chargeable to a capital account rather than to expense.

There are alternative terms such as ‘capital good’, ‘capital assets’ and ‘capital expenditure’, which can be defined as follows:

1.  Capital goods: Capital in the form of fixed assets used to produce goods, such as plant and equipment.

2.  Capital assets: Assets, tangible and intangible, used to generate revenues on cost savings by providing production, distribution or service capabilities for more than one year.

3.  Capital expenditure: An expenditure on acquisition of tangible productive assets, which yield continuous service beyond the accounting period in which they are bought.

Putting all of the above definitions together, the term ‘capital expenditure’ will be used in the context of this course, which emphasises three important characteristics:

1.  Tangibility: Capital equipment can be physically touched or handled.

2.  Productivity: Capital equipment is used to produce goods or services.

3.  Durability: Capital equipment has a life longer than one year.

Capital equipment can be generalised into six types:

1.  Buildings (permanent constructions)

2.  Installation equipment (plant, machinery and equipment used directly in producing goods and services)

3.  Accessory equipment (major equipment used to facilitate the production of goods and services or to enhance the operations of organisation, e.g., transport vehicles for staff )

4.  Operating equipment (semi-durable minor equipment that is movable and used in, but not generally essential to, the production of goods and services, e.g., goggles)

5.  Tools and instruments (semi-durable or durable portable minor equipment required and associated with the production of goods and services, e.g., timing devices)

6. Furnishing and fittings (all goods and materials employed to fit buildings for organisational purposes, e.g., carpets)

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