equipment costing: what you don’t track can hurt you (the devil is in the details)

Equipment Costing:What You Don’t

Track Can Hurt You

(The Devil is in the Details)

Goal: Enjoy Life - make money

Focus on Tract Profitability Revenue is the easy part (usually) Contractor Pay is straightforward Employee Pay is somewhat complicated

– Determine the employee ‘load’ Cost of your own equipment is hard to

calculate.– How much per ton does it cost to run a logging

machine?

Equipment Costs

Full Cost Accounting Operating Expenses – Fluids, Service Operator Expenses – Labor, Overhead Capital Expenses – Depreciation Return on Investment

– Think of yourself as the bank

Basic Approach (Step 1)

Sum up all machine costs for the year Divide by Production Hours (Implicitly

Accounts for Down Time)

Annual Costs $220,000

Production Hours 2,000

Hourly Cost $110.00

Example:

Basic Approach (Step 2)

Multiply Hours on Tract by Hourly Rate (step 1) Divide by Tract Production Result: Cost per Ton

Tract Hours 200 Hrs

Cost/Hour $110/Hr

Tract Mach. Cost $22,000

Cost per Ton $5.00

Example:

(Tract Tons:

4,400)

Operator Expenses

Direct Payroll Pay for both Production Time and non-

Production (down) Time Payroll Load

– Payroll Taxes, Benefits (Company Share)

Share of allocated overhead ??

Capital Expenses

Capital Cost of the Machine Divided by Lifetime Hours (Depreciation)– E.g. $500,000 Machine / 10,000 Hrs = $50/hr

Capital Costs Should Include Capital Repairs – E.g., Replacing an Engine

Insurance Costs Profit (Return on Investment)

Return on Investment

Think of Yourself as the Bank– You supply the cash

Analogy: The labor you supply deserves a market price; so does your capital

Economic “profit” is that earned over and above a normal return on investment

Accounting profit is a regulatory concept

Operating Expenses

Repairs and Maintenance– E.g., Filters, Tires, Hoses– Capital Repairs included in Capital Costs

Service Performed by Employees Mechanics (Employee) must be assigned their

full cost (mimic cost of outside mechanic) Fuel – Big Problem

– If the price of fuel goes up $0.50 per gallon, how much does my cost per ton change?

33¢ / Gallon

Diesel$4.00/Gallon

Fuel Example

Fuel Price Change $0.50

Consumption per Hour 5 gallons

Production (Tons/Hour) 25

Additional Cost $.10/Ton

Calculation = 0.50 x 5 / 25

Must be Performed for Each Machine

Fuel Example – Tract

Activity Hours Hrly Rate 1 Hrly Rate 2

Falling 210 $135.00 $137.75

Delimbing 200 $130.00 $132.50

Skidding 130 $125.00 $127.00

Loading 55 $120.00 $122.25

Total Cost $77,200 $78,661

Tons 5,000 5,000

Cost / Ton $15.44 $15.73 $0.29

Implementing the Concept

(Logger Participation)

Equipment Cost Template

Track & Document - Expenses

Track & Document – Hours by Job

Monitor – Job Costs

Fuel Increase of $0.50

Summary

Track all your machine expenses Work with a system (worksheet, software)

that allows you to estimate your hourly machine costs

Track labor & machine hours by activity on each tract/job

It’s Your Money . . . Do You Know Where it Is?Information is POWER.