Cost per occupancy is a usual term and might refer to the occupancy costs related to hotel management, properties, or commercial real estate. Before acknowledging cost per occupancy, it is essential to comprehend what occupancy costs entail and determine them.
Occupancy or operating costs are a group of costs associated with maintaining a property. While leasing a property, the contractor will pay his proportionate share of the operating cost based on the leased area. In most cases where occupancy costs modify frequently will establish certain variable factors, including maintenance, weather, and other requirements.
These factors will call for going over the preliminary budget, and therefore, the proprietor will have to make mandatory alterations to transmit his burden to the contractor. Once this cost is recognized, the price per occupancy becomes a much effortless determination.
Elements of Occupancy Cost
A tiny portion of the occupancy cost of a commercial property includes:
- Property taxes.
- Repair and maintenance.
- Building insurance utilities.
- Some voluntary prices are negotiated before drafting a lease agreement.
Various fees are considered to identify the cost per occupancy, including rent, additional services, load factors, and refund of occupancy costs.
An occupancy cost has two significant components: fixed and variable costs.
A fixed cost is a fee that does not modify with increasing or decreasing sales or productivity. You must pay it timely regardless of the business’s activity or performance. The fixed cost helps in generating desirable profits.
Variable costs refer to the charge that relates to production. Unlike fixed costs, variable cost improves as production increases and lessens vice versa. Variable costs include raw materials and utility bills. For instance, in the case of a restaurant chain that sells French fries, it will need to increase the purchases of potatoes from the vendors to enhance sales.
How to Calculate Cost Occupancy
Businesses must keep track of cost occupancy and the costs connected with non-operating activities, including internet bills on loans. Both accounts differ in a company’s accounts, allowing financers to determine how costs are associated with income-generating activities and whether the business can run more efficiently.
Trimming a company’s cost per occupancy can diminish a company’s productivity and profitability. Reducing excess costs usually increases temporary profits, but it can also eventually hurt the business’s income. For instance, if a company reduces its advertising costs, its earnings will increase since it cuts down the occupancy costs.
For calculating the occupancy cost, the following formula comes in handy. Additionally, you will get the information required from the company’s income statement to report the financial performance for the period.
Now that we have successfully comprehended occupancy costs and what they contain, it is time to acknowledge cost per occupancy, which refers to the cost acquired by each tenant. In other words, cost per occupancy is a mechanism that relies heavily on total occupancy costs.
Operating costs = cost of goods sold+ operating expenses
- Take the total cost of goods sold from the company’s income statement, also known as the cost of sales.
- Look out for total operating expenses, which must be further down the income statement.
- Add total operating expenditures and COGS to approach the total operational costs for the period.
The resulting figure will provide cost per occupancy, which helps recognize the proportion of the total cost by each occupant. Careful identification of each cost head is significant to arrive at a particular figure.
Remember that the three components of the total occupancy costs illustrated in the formula are associated with cost elements.
You might study occupancy costs by utilizing the occupancy sales ratio. In comparison, they can also divide the sales figure to determine the occupancy ratio. Furthermore, you might calculate the occupancy cost by area by dividing the sales figure by the square feet of a particular property.About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.