Introduction
Industrial products can be categorized according to their cost and the purpose of their use. The three categories in this dimension are production, expense, and capital items.
Production Items
Production items are goods and services that are utilized immediately in the process of production or conversion. For instance, when petroleum is converted into gasoline or loads of tea are processed into tea bags, these are production items (Ebert & Griffin, 2019). Another example is passenger demand for information that is converted into train, bus, or flight services. When airline services utilize jet fuel to carry passengers, this is another instance of a production item (Ebert & Griffin, 2019). Production items are primary services or products that a company produces and sells to generate revenue. Manufactured goods, raw materials, and services all constitute production items.
Expense Items
Meanwhile, expense items are the costs related to running a business. These include labor, rent, materials, utilities, and other expenses. Expense items are the products and services that an organization consumes over a year while producing its goods or supplying its services (Ebert & Griffin, 2019). The term ‘expense’ is derived from the standard practice of accounting, where expenditures are referred to either as expense items or capital items.
The classification depends on when the items are consumed (Ebert & Griffin, 2019). For instance, building maintenance services and paper used in printers are referred to as expense items if they are anticipated to be consumed within one year. Advertising, office supplies, travel costs, and others are expense items. Legal services, electricity for machines, and other similar products and services are also expense items.
Capital Items
Finally, capital items are a company’s long-term investments to enhance its operations and boost its overall value. Capital items may be tangible (equipment, machinery, and real estate) and intangible (copyrights, patents, and brand names). Capital items are longer-lasting than production and expense items. They are more expensive and sometimes even permanent, with an expected life of more than one year and typically lasting several years.
Capital items include buildings (such as offices and factories), fixed equipment (such as baking ovens and water storage towers), and accessory equipment (such as computers and information systems) (Ebert & Griffin, 2019). Generally, the organization must be ready to make a long-term commitment to purchasing a capital item since items such as architectural services, longstanding insurance contracts, and financial advisory services are rather expensive and tend to last a long time. Due to these factors, high-level managers usually decide to buy capital items.
Conclusion
To conclude, the differences between production, expense, and capital items are concerned with their longevity and purpose of use. Production items have the shortest life span, whereas capital items have the longest. Expense items are the ones consumed by an organization over a year. Furthermore, the level of decision-making involved in purchasing each type of item differs. While anyone in the office or a company can buy paper for the printer or coffee for the office kitchen, the final decision of whether the organization needs to hire a new lawyer or initiate a new advertisement campaign lies on the shoulders of the high-level managers.
Reference
Ebert, R. J., & Griffin, R. W. (2019). Business Essentials (12th ed.). Pearson.