cfma 2010 unscramble and balance your equipment account
DESCRIPTION
Your Equipment Account is an aggregation of a lot of numbers. Sometimes it balances more by good luck than good management. Most times one equipment category subsidizes another and frequently a saving in parts cost is used to balance an overrun in fuel. The ideas set out in this presentation will help you unscramble the account, see where the problems lie and take appropriate action.TRANSCRIPT
Mike Vorster.President, CEMPCentral [email protected]
AGC of America – CFMA
AGC of America – CFMA
Annual Construction Financial Management Conference October 2010
Unscrambling and Balancing Your Equipment Account.
It need not be a mystery
1. Equipment Managementi. Why is it so fascinatingii. What do we do
2. The Ratei. Know it is a transfer priceii. Focus on costiii. Resolve the language issue
Unscrambling and Balancing Your Equipment Account.
3. Equipment Costsi. Owning costsii. Operating costsiii. The rate calculation
4. Equipment costingi. Equipment vs. job costingii. Understand variances
Unscrambling and Balancing Your Equipment Account.
5. Unscrambling the accounti. Horizontal slicingii. Rate splitsiii. Vertical slicing
6. Taking actioni. Manage by categoriesii. Manage by linesiii. Actions speak louder than budgets
Unscrambling and Balancing Your Equipment Account.
Chapter 1 Equipment management
Chapter 2 Organization
Chapter 4 The rate calculation
Chapter 5 Owning costs
Chapter 6 Operating costs
Chapter 9 Performance measures
Chapter 12 Budgets and budgeting
For all the background, go to:
www.cempcentral.com or, come to the CEMP.
Unscrambling and Balancing Your Equipment Account.
6
Operational
Financial
Mechanical
Equipment ManagementWhy is it so fascinating.
P1
7
So……… what do we do.
Equipment Management
So….
What do we do
Field Maintenance Operations
Fleet and Asset
Management
Production Interface and
Logistics
Compliance and Risk
Management
Acquisition and Disposal
Shop and Yard Operations
These generate
the Owning Costs
These generate the Operating Costs
Compliance and Risk
Management
ProductionInterface and
Logistics
Field Maintenance Operations
Acquisition and Disposal
Fleet and Asset
Management
Shop and Yard Operations
These ensure that you have the right equipment in the right place at the right time
P 3
Equipment Management
Compliance and Risk
Management
Field Maintenance Operations
Acquisition and Disposal
Fleet and Asset
Management
Shop and Yard Operations
You rely on these
functionsLong term decisions
The Site sees these functionsShort term decisions
ProductionInterface and
Logistics
Equipment Management
Compliance and Risk
Management
Field Maintenance Operations
Acquisition and Disposal
Fleet and Asset
Management
Shop and Yard Operations
MechanicalTechnical hands on
“Field”
Administrative
Clerical Strategic“Office”
Skills, aptitudes and attitudes
ProductionInterface and
Logistics
Equipment Management
14
Summary of Activity by Function
1. Acquisition and Disposal 4. Field Maintenance Operations
Specification and selection Standardization OEM Negotiations Disposal
Fuel Lubrication and oil analysis Condition assessment Preventive maintenance Wear parts
2. Compliance and Risk Management 5. Shop and Yard Operations
Licensing Insurance Inspection and authorized repair Emissions compliance Taxation and duty
Fabrication Refurbishment Storage and inventory control Repair and rebuild Record keeping and work orders
3. Production Interface and Logistics 6. Fleet and Asset Management
Project planning Operations analysis Long range fleet planning Fleet balancing Dispatch and transport
Data analysis Rate calculations Economic life and fleet planning Capital budgeting ROI and financial analysis
Clear responsibilities with corresponding authority and accountability can be defined for each of the six functions.
Functions
Risks
Competencies
P5
Equipment Management
15
Operational
Financial
Mechanical
The RateA transfer price.
“The Rate”
16
You experience rain
• In relatively big amounts
• At discrete points in time
You use water
• At a relativly constant rate
• At regular time intervals
The Rate
17
You will experience equipment costs
• In relatively big amounts
• At discrete points in time
You need to recover these costs
• At a constant rate
• At regular time intervals
The Rate
18
Internal transfer price as “cost”
Internal transfer price as
“income”
Income from sale of product
True cost of equipment used
Production goal
Equipment goal
Real goals
“The Rate”
P18
Mutual interdependence
The RateA transfer price.
19
Internal cost recovery as
“cost”
Internal cost recovery rate
Income from sale of product
True cost of equipment used
Production goal
Equipment goal
Real goals
A uniform systematic way of recovering the
actual costs you experience
You experience these costs – they occur at intervals in relatively
large transactions
A uniform systematic way of allowing for the
actual costs you will experience
P18Mutual interdependence
The RateA transfer price or a cost recovery rate
The RateResolve the language issue
Internal revenue rate
XHours charged = Equipment
revenue _True equipment costs
= Gain or loss on equipment
Budget rate XHours worked =
Budget or Earned Value budget
_ Actual costs experienced = Varience
Cost recovery rate
XHours worked = Costs
recovered _ Costs experienced = Over or under
recovery
Your call – language can create silos or teams
Many Names for the Same Thing
If a machine has a rate of $65 per hour and if it is charged to operations for 100 hours, then we can describe the $6,500 charge in many ways. Here are a few:
1. Equipment cost – Estimators and construction managers see $65 as a real value for the “equipment cost.” They use it in estimating and job costing and seldom make adjustments to reflect reality. This neglects the fact that the $65 per hour is in itself an estimate with substantial variability and supports the notion that the equipment actually costs $65 per hour. As with all estimates, the actual cost may, or it may not be $65 depending on a number of factors.
2. Equipment revenue – The equipment account sees the $6,500 as a revenue or a credit to the equipment account. This “revenue” is set against the actual cost to calculate a profit or a loss in the equipment account. This neglects the fact that the $65 per hour is in fact an internal charge and supports the notion that the equipment account actually “makes” or “looses” money.
3. Earned budget – The concept here is that the $65 per hour is a budget rate that is multiplied by the hours worked as a way to generate or “earn” a variable budgeted amount used in the classical “budget, actual, variance” analysis of an equipment account. This supports the notion that equipment earns a budget by working and that the $65 per hour “rate” is the benchmark used in the budgeting process.
4. Cost recovery – The concept here is that the $65 per hour is a routine systematic hourly charge needed to compensate for or recover the actual costs expected to be experienced over a given period, normally the life of the machine. This supports the notion that “the rate” is, in the final analysis, nothing more than the average of the costs experienced and that everyone in the company can contribute to a lower “rate” by making decisions that reduce actual equipment costs.
P27
1. Equipment Managementi. Why is it so fascinatingii. What do we do
2. The Ratei. Know it is a transfer priceii. Focus on costiii. Resolve the language issue
Unscrambling and Balancing Your Equipment Account.
3. Equipment Costsi. Owning costsii. Operating costsiii. The rate calculation
4. Equipment costingi. Equipment vs. job costingii. Understand variances
Unscrambling and Balancing Your Equipment Account.
24
The costs associated with owning a machine and keeping it in your fleet.
Equipment CostsOwning costs.
25
You will experience owning costs
• In relatively big amounts
• At discrete points in time
You need to recover these costs
• At a constant rate
• At regular time intervals
Costs - Charges
Equipment CostsOwning costs.
26
1. Depreciation
Equipment is a depreciating asset. The value of our investment decreases with age - you must recognize this and set funds aside to replace the asset
2. Interest
Our investment in equipment must provide a return on the amount we have invested
3. Other Owning
There will be additional costs for keeping a machine in our fleet. These include the cost of licenses, insurances, property taxes and the like
Have to do with
accounting, finance and administration.
Equipment CostsOwning costs.
27
1. Depreciation
Equipment is a depreciating asset. The value of our investment decreases with age - you must recognize this and set funds aside to replace the asset
2. Interest
Our investment in equipment must provide a return on the amount we have invested
3. Other Owning
There will be additional costs for keeping a machine in our fleet. These include the cost of licenses, insurances, property taxes and the like
Annual or hourly ?
Annual or hourly ?
Annual or hourly ?
Equipment CostsOwning costs.
28
Owning Cost
$6
$8
$10
$12
$14
$16
$18
5000 6000 7000 8000 9000
Hours Worked
$ p
er
ho
ur
Hourly owning cost goes down with age.
It depends on the rate at which residual market value decreases and the number of hours worked in a year.
Equipment CostsOwning costs.
29
Operating costs - the costs you incur once you turn the key
Equipment CostsOperating costs.
30
1. Operator ?
2. Fuel
3. Tires/Tracks
4. Ground engaging tools
5. Inspection and PM
6. Repairs
7. Rebuilds
Interval Between Actions
Cost ofAction
Equipment CostsOperating costs.
31
We can calculate - estimate (guess at) - either the interval between actions or the cost of an action for many of the categories.
We are, however very stuck when it comes to parts and labor for repairs and rebuilds.
We know :
1. We are talking lots of money.
2. Expenditure increases with age.
3. Increasing expenditure probably
determines how long we should keep the machine.
Equipment CostsOperating costs.
32
1. FuelCost times factor times consumption
2. Wear parts (implement)Cost times factor times life
3. Tires or tracks (traction)Cost times factor times life
4. Preventive maintenanceCost times interval
5. Repair parts and laborThe big uncertainty
- comes in chunks- increases with age- dependent on conditions
Annual or hourly ?
Constant
Have to do with oil, grease, parts and labor
in the field.
Equipment CostsOperating costs.
33
Repair parts and labor
Linear Component of cost
Exponential Component of cost
Cumulative Repair Costsy = 0.0022x2 + 3.0292x
R2 = 0.9544
$0
$40,000
$80,000
$120,000
$160,000
$200,000
$240,000
$280,000
$320,000
$360,000
$400,000
$440,000
$480,000
$520,000
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Hours worked
Cu
mu
lati
ve R
epai
r C
ost
All
101102103104105Poly. (All)
Equipment CostsOperating costs. (data)
34
Cumulative cost of repair parts and labor
= A X age + B X
age 2Linear Component Exponential Component
Equipment CostsOperating costs. (data)
35
You will have an “A” Measures expenditure with age
$ per hour stays the same as the machine ages
You MUST manage “B” Measures increase in
expenditure with increase in age
$ per hour increases as the machine ages
Equipment CostsOperating costs. (data)
36
1. Operator ?
2. Fuel
3. Tires/Tracks
4. Ground engaging tools
5. Inspection and PM
6. Repairs
7. Rebuilds
Interval Between Actions
Cost ofAction
Can we handle
these two on the
basis of interval
between action
and cost of an
action
Equipment CostsOperating costs. (components)
37
A J K L
Cost
Life
1000 x $2,500 $2,500 $2,500 $2.50
2000 x $2,500 $2,500 $5,000 $2.50
3000 x $2,500 $2,500 $7,500 $2.50
4000 $1,563 x $2,500 $4,063 $11,563 $2.89
5000 $500 x $3,125 x $2,500 $6,125 $17,688 $3.54
6000 x $1,000 $1,563 x $2,500 $5,063 $22,750 $3.79
7000 $500 $3,900 $3,300 x $2,500 $10,200 $32,950 $4.71
8000 x $7,800 x $6,600 x $2,500 $16,900 $49,850 $6.23
9000 $3,900 $3,300 $1,563 x $2,500 $11,263 $61,113 $6.79
10000 x $3,125 x $2,500 $5,625 $66,738 $6.67
11000 $7,150 $500 $6,950 $1,563 x $2,500 $18,663 $85,400 $7.76
12000 x $14,300 x $1,000 x $13,900 x $2,500 $31,700 $117,100 $9.76
13000 $7,150 $500 $6,950 x $2,500 $17,100 $134,200 $10.32
14000 $1,563 x $2,500 $4,063 $138,263 $9.88
15000 $3,900 $7,500 $3,300 x $3,125 x $2,500 $20,325 $158,588 $10.57
16000 x $7,800 x $15,000 x $6,600 $1,563 x $2,500 $33,463 $192,050 $12.00
17000 $500 $3,900 $7,500 $3,300 x $2,500 $17,700 $209,750 $12.34
18000 x $1,000 x $2,500 $3,500 $213,250 $11.85
19000 $500 $1,563 x $2,500 $4,563 $217,813 $11.46
20000 x $3,125 x $2,500 $5,625 $223,438 $11.17
21000 $1,563 x $2,500 $4,063 $227,500 $10.83
22000 x $2,500 $2,500 $230,000 $10.45
23000 $7,150 $500 $6,950 $3,900 $3,300 x $2,500 $24,300 $254,300 $11.06
24000 x $14,300 x $1,000 x $13,900 x $7,800 x $6,600 $1,563 x $2,500 $47,663 $301,963 $12.58
25000 $7,150 $500 $6,950 $3,900 $3,300 x $3,125 x $2,500 $27,425 $329,388 $13.18
26000 $1,563 x $2,500 $4,063 $333,450 $12.83
27000 x $2,500 $2,500 $335,950 $12.44
28000 x $2,500 $2,500 $338,450 $12.09
29000 $500 $1,563 x $2,500 $4,563 $343,013 $11.83
30000 x $1,000 x $3,125 x $2,500 $6,625 $349,638 $11.65
31000 $500 $3,900 $7,500 $3,300 $1,563 x $2,500 $19,263 $368,900 $11.90
32000 x $7,800 x $15,000 x $6,600 x $2,500 $31,900 $400,800 $12.53
33000 $3,900 $7,500 $3,300 x $2,500 $17,200 $418,000 $12.67
34000 $1,563 x $2,500 $4,063 $422,063 $12.41
35000 x $3,125 x $2,500 $5,625 $427,688 $12.22
E
Lift Cylinders
H I
Major Components
Transmission Hydraulics Axles Bucket
F G
Engine
B C D
Miscellaneous
12,000 6,000 12,000 8,000
$6,250 $2,500
1,000
$28,600 $2,000 $27,800 $15,600
16,000
$30,000 $13,200
Turbo
8,000 5,000
Total Life-to-Date Total
Cum $ per Cum Hr
P 99
Equipment CostsOperating costs. (components)
38
P 100
y = 0.0001x2 + 6.1101xR² = 0.9765
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
0 4000 8000 12000 16000 20000 24000 28000
Lif
e-to
-Dat
e C
ost
Life-to-Date Hours Worked
Life-to-Date Major Component Cost
Equipment CostsOperating costs. (components)
39
Hourly operating cost goes up with age.
It depends on the rate at which expenditure on repair parts and labor increases as the machine ages.
Cumulative Parts and Labor Cost y = 0.0022x2 + 3.0292x
R2 = 0.9544
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
0 2,000 4,000 6,000 8,000 10,000 12,000 14,000
Cumulative hours worked
Cu
mu
lati
ve c
ost
s
We are able to define the relationship between cost and age and determine the rate at which costs increase with age.
Equipment CostsOperating costs.
40
Many ways to do itAccuracy comes from the quality of your estimates not from the complexity of the way you crunch the numbers.
Assumed life and utilization Residual market value Required interest rate Other owning costs (licenses, insurances, property taxes)
Repair parts and labor Cost of an action Interval between actions
Include what you must, make good estimates, do the calculations in a way that everyone understands.
P 55
Equipment CostsThe Rate Calculation.
41
Just one of many ways to do it
# Item Calculation Value Units Rate: $/hr Notes
1 Expected life 5 yrs
2 Expected utilization 2,000 hrs per yr See Section 5-1
3 Standard Utilization 1,800 hrs per yr
4 Expected hours when sold 1 X 2 10,000 hours
5 Effective hours when sold 1 X (.6 X 2 + .4 X 3) 9,600 hours See Section 5-1
6 Purchase price $118,000
7 Estimated residual market value $30,470 See sections 5-1 and 5-2.
8 Depreciation 6 - 7 $87,530 for 5 yrs See sections 5-4 and 5-5
9 Rate to cover depreciation 8 ÷ 2 $8.75 per hour
10 Basis for annual interest SAV: (6 + 7) ÷ 2 $74,235 See Section 5-3
11 Annual interest rate 6.0% % per yr
12 Annual interest cost 10 X 11 $4,454 per yr
13 Rate to cover interest 12 ÷ 2 $2.23 per hour
14 Annual cost of insurance, licenses etc $5,600 per yr
15 Rate to cover other owning 14 ÷ 2 $2.80 per hour
16 TOTAL OWNING COST 9 + 13 + 15 $13.78 per hour
17 Fuel - direct cost $2.95 per gal Direct cost. See Section 6-1
18 Fuel - dispensing cost $1.18 per gal See Section 6-1
19 Fuel consumption 3.6 GPH Based on records
20 Rate to cover fuel (17 + 18) x 19 $14.87 per hour
21 Wear Parts - direct cost $2,600 per set Direct cost. See Section 6-1
22 Factor on cost 1.2 For installation
23 Expected life 500 hours Based on expected conditions
24 Rate to cover wear parts 21 X 22 ÷ 23 $6.24 per hour
25 Tires/Tracks - direct cost $9,500 per set Direct cost. See Sections 6-1
26 Factor on cost 1.1 For installation
27 Expected life 4000 hours Based on expected conditions
28 Rate to cover tires/tracks 25 X 26 ÷ 27 $2.61 per hour
29 PM service - direct cost $800 each Direct cost. See Sections 6-1
30 Factor on cost 1.3 For travel
31 PM Service interval 250 hours Fixed by policy
32 Rate to cover PM 29 X 30 ÷ 31 $4.16 per hour
33 Estimated repair parts and labor cost $119,600 sum See Sections 6-2 and 6-3
34 Rate to cover repair parts and labor 33 ÷ 4 $11.96 per hour
35 TOTAL OPERATING COST $39.84 per hour
36 Apportioned overhead based on revenue $5,600 per yr
37 Rate as a contribution to overhead 36 ÷ 2 $2.80 per hour
38 TOTAL OWNING AND OPERATING COST 16 + 35 + 37 $56.42 per hour
20 + 24 + 28 + 32 + 34
P 53
42
Owning Cost
$6
$8
$10
$12
$14
$16
$18
5000 6000 7000 8000 9000
Hours Worked
$ p
er
ho
ur
# Item Calculation Value Units Rate: $/hr Notes
1 Expected life 5 yrs
2 Expected utilization 2,000 hrs per yr See Section 5-1
3 Standard Utilization 1,800 hrs per yr
4 Expected hours when sold 1 X 2 10,000 hours
5 Effective hours when sold 1 X (.6 X 2 + .4 X 3) 9,600 hours See Section 5-1
6 Purchase price $118,000
7 Estimated residual market value $30,470 See sections 5-1 and 5-2.
8 Depreciation 6 - 7 $87,530 for 5 yrs See sections 5-4 and 5-5
9 Rate to cover depreciation 8 ÷ 2 $8.75 per hour
10 Basis for annual interest SAV: (6 + 7) ÷ 2 $74,235 See Section 5-3
11 Annual interest rate 6.0% % per yr
12 Annual interest cost 10 X 11 $4,454 per yr
13 Rate to cover interest 12 ÷ 2 $2.23 per hour
14 Annual cost of insurance, licenses etc $5,600 per yr
15 Rate to cover other owning 14 ÷ 2 $2.80 per hour
16 TOTAL OWNING COST 9 + 13 + 15 $13.78 per hour
17 Fuel - direct cost $2.95 per gal Direct cost. See Section 6-1
18 Fuel - dispensing cost $1.18 per gal See Section 6-1
19 Fuel consumption 3.6 GPH Based on records
20 Rate to cover fuel (17 + 18) x 19 $14.87 per hour
21 Wear Parts - direct cost $2,600 per set Direct cost. See Section 6-1
22 Factor on cost 1.2 For installation
23 Expected life 500 hours Based on expected conditions
24 Rate to cover wear parts 21 X 22 ÷ 23 $6.24 per hour
25 Tires/Tracks - direct cost $9,500 per set Direct cost. See Sections 6-1
26 Factor on cost 1.1 For installation
27 Expected life 4000 hours Based on expected conditions
28 Rate to cover tires/tracks 25 X 26 ÷ 27 $2.61 per hour
29 PM service - direct cost $800 each Direct cost. See Sections 6-1
30 Factor on cost 1.3 For travel
31 PM Service interval 250 hours Fixed by policy
32 Rate to cover PM 29 X 30 ÷ 31 $4.16 per hour
33 Estimated repair parts and labor cost $119,600 sum See Sections 6-2 and 6-3
34 Rate to cover repair parts and labor 33 ÷ 4 $11.96 per hour
35 TOTAL OPERATING COST $39.84 per hour
36 Apportioned overhead based on revenue $5,600 per yr
37 Rate as a contribution to overhead 36 ÷ 2 $2.80 per hour
38 TOTAL OWNING AND OPERATING COST 16 + 35 + 37 $56.42 per hour
P 53
Equipment CostsThe Rate Calculation.
43
# Item Calculation Value Units Rate: $/hr Notes
1 Expected life 5 yrs
2 Expected utilization 2,000 hrs per yr See Section 5-1
3 Standard Utilization 1,800 hrs per yr
4 Expected hours when sold 1 X 2 10,000 hours
5 Effective hours when sold 9,600 hours See Section 5-1
6 Purchase price $118,000
7 Estimated residual market value $30,470 See sections 5-1 and 5-2.
8 Depreciation 6 - 7 $87,530 for 5 yrs See sections 5-4 and 5-5
9 Rate to cover depreciation 8 ÷ 2 $8.75 per hour
10 Basis for annual interest SAV: (6 + 7) ÷ 2 $74,235 See Section 5-3
11 Annual interest rate 6.0% % per yr
12 Annual interest cost 10 X 11 $4,454 per yr
13 Rate to cover interest 12 ÷ 2 $2.23 per hour
14 Annual cost of insurance, licenses etc $5,600 per yr
15 Rate to cover other owning 14 ÷ 2 $2.80 per hour
16 TOTAL OWNING COST 9 + 13 + 15 $13.78 per hour
17 Fuel - direct cost $2.95 per gal Direct cost. See Section 6-1
18 Fuel - dispensing cost $1.18 per gal See Section 6-1
19 Fuel consumption 3.6 GPH Based on records
20 Rate to cover fuel (17 + 18) x 19 $14.87 per hour
21 Wear Parts - direct cost $2,600 per set Direct cost. See Section 6-1
22 Factor on cost 1.2 For installation
23 Expected life 500 hours Based on expected conditions
24 Rate to cover wear parts 21 X 22 ÷ 23 $6.24 per hour
25 Tires/Tracks - direct cost $9,500 per set Direct cost. See Sections 6-1
26 Factor on cost 1.1 For installation
27 Expected life 4000 hours Based on expected conditions
28 Rate to cover tires/tracks 25 X 26 ÷ 27 $2.61 per hour
29 PM service - direct cost $800 each Direct cost. See Sections 6-1
30 Factor on cost 1.3 For travel
31 PM Service interval 250 hours Fixed by policy
32 Rate to cover PM 29 X 30 ÷ 31 $4.16 per hour
33 Estimated repair parts and labor cost $119,600 sum See Sections 6-2 and 6-3
34 Rate to cover repair parts and labor 33 ÷ 4 $11.96 per hour
35 TOTAL OPERATING COST $39.84 per hour
36 Apportioned overhead based on revenue $5,600 per yr
37 Rate as a contribution to overhead 36 ÷ 2 $2.80 per hour
38 TOTAL OWNING AND OPERATING COST 16 + 35 + 37 $56.42 per hour
20 + 24 + 28 + 32 + 34
P 53
Equipment CostsThe Rate Calculation.
44
Owning and Operating costs
Owning costs Operating Costs
Fuel $14.87
Wear parts $6.24
Tires $2.61
P. M. $4.16
Repair parts and labor $11.96
Depreciation $8.75
Interest $2.23
Licenses, insurance etc. $2.80
$56.42 per hour
$39.84$13.78
Only at 5yrs and 10,000 hours
And $2.80 to the overhead account
Equipment CostsThe Rate Calculation – Rate Splits.
3. Equipment Costsi. Owning costsii. Operating costsiii. The rate calculation
4. Equipment costingi. Equipment vs. job costingii. Understand variances
Unscrambling and Balancing Your Equipment Account.
46
Equipment CostingEquipment vs. job costing.
Earn budget Experience cost Completion
Job Costing
Quantity of work done or % complete times budget rate or budget for job
Spend on resources as you do the work. Most costs proportional to quantity
Known quantity of work to be done
Budget variances lie on the job.
Who is responsibleWhat is the resultWhat is the score
47
Equipment CostingEquipment vs. job costing.
Earn budget Experience cost Completion
Equipment Costing
Hours or days worked or on site times hourly or daily rate
Many or most costs incurred before or after doing work. Cost can be deferred
Life of machine not known. When to stop spending is key decision
Budget variances lie ???
Who is responsibleWhat is the resultWhat is the score
48
You will experience equipment costs
• In relatively big amounts
• At discrete points in time
You need to recover these costs
• At a constant rate
• At regular time intervals
Equipment Costing
• You must recover what you experience – no more and no less.
• Each category must look after itself.• The less cost you experience the less you need to
recover.• The rate is the end result.• The rate is, in and of itself, an estimate.
Equipment CostingEquipment vs. job costing.
Experience Recover
Equipment Costing
To manage owning costs you must To manage operating cost you must
Be closely aligned to accounting and finance
Be closely aligned to operations in the shop and in the field
Be an expert in acquisition, finance and disposal
Be an expert in maintenance, repair, rebuild, and shop operations
Owning costs Operating costs
Have to do with finance, capital and capital budgeting
Have to do with parts, labor, fuel, oil and grease
Occur on an annual basis because you have the machine in your fleet
Occur on an hourly basis because you have turned the key and gone to work
Are largely set by the “quality of the deal” when you bought the machine
Are largely set by the age, operation and application when you put the machine to work
Hourly cost goes down as age increases Hourly cost goes up as age increases.
Equipment vs. job costing.
Equipment CostingUnderstanding variances – gaining insights.
Differentiating between volume variances and buying variances assists in analyzing equipment budgets because:
Owning cost variances are mostly volume variances based on the fact that the owning-cost rate (designed to cover costs such as depreciation, loans, leases, insurance and property taxes) is largely predetermined and the only uncertainty is the volume – or hours – of work performed by the machine;
Operating cost variances are mostly buying variances due to the fact that costs such as fuel, ground engaging tools, maintenance and repairs are mostly variable and depend on the actual cost of the resources used.
Equipment CostingUnderstanding variances - reallocation.
Positive impact Negative impact
Budget variances on the equipment account are not reallocated and are consolidated at a company level.
Simple and straight forward. Equipment and operating divisions carry the full impact of their budgets and budgeting decisions. Equipment moves easily through out the company and carries its cost with it.
Neither project nor operating division managers are ever aware of true equipment costs. Everyone “pays” the same rate. Internal transfer prices become synonymous with equipment cost.
Budget variances on the equipment account are reallocated back to operating divisions on a pro-rata basis based on equipment revenue.
Expresses the fact that money is made in operations.
Project and operating division managers do not accept arbitrarily reallocated variances coming from areas not under their control. They attack the system used and see it as unfair.
Budget variances on the equipment account are clearly and accurately determined by operating fleet and reallocated back to the operating division or company that generated the variance.
Variances are accurately calculated and reallocated for each operating fleet. Variances are carried by the organizational unit where the machines worked. Responsibility and accountability are matched within each unit.
The cost of shared services, shops and overheads needs to be allocated to sub fleet accounts. The creation of relatively static sub fleets can give rise to lower utilization and duplication of some services.
P 222
3. Equipment Costsi. Owning costsii. Operating costsiii. The rate calculation
4. Equipment costingi. Equipment vs. job costingii. Understand variances
Unscrambling and Balancing Your Equipment Account.
5. Unscrambling the accounti. Horizontal slicingii. Rate splitsiii. Vertical slicing
6. Taking actioni. Manage by categoriesii. Manage by linesiii. Actions speak louder than budgets
Unscrambling and Balancing Your Equipment Account.
Unscrambling the AccountHorizontal slicing.
Total1
2
3
4
5
6
34
35
36
37
123
124
125
234
235
236
237
Budget Actual Variance
All costsAll units
If you have
enough things
then on the
average the
average will
be average.
Unscrambling the AccountHorizontal slicing.
Cat ClassA1 1A1 1A1 1A1 2A1 2A1 3
B A VA2 1A2 2A2 2A2 3
B A VC4 1C4 1C4 1
B A VD7 1D7 1D7 2D7 2
B A VBudget Actual Variance
All costs
A1
A2
C4
D7
Manage by category
Each category and class looks after itself.
No cross subsidizing.
57
Owning and Operating costs
Owning costs Operating Costs
Fuel $14.87
Wear parts $6.24
Tires $2.61
P. M. $4.16
Repair parts and labor $11.96
Depreciation $8.75
Interest $2.23
Licenses, insurance etc. $2.80
$56.42 per hour
$39.84$13.78
Only at 5yrs and 10,000 hours
And $2.80 to the overhead account
Rate Splits.
Unscrambling the Account
B C D E F G H I
1 PERIOD
2 EX M
3
4
5 Budget Actual Act/Bud %
6 $13.78 3,721 $51,275 $60,200 ($8,925) $13.78 $16.18 117.4%
7 $24.97 3,721 $92,913 $88,600 $4,313 $24.97 $23.81 95.4%
8 $14.87 3,721 $55,331 $60,750 ($5,419) $14.87 $16.33 109.8%
9 $2.80 3,721 $10,419 $11,461 ($1,042) $2.80 $3.08 110.0%
10 $56.42 $209,939 $221,011 -$11,072 $56.42 $59.40 105.3%
A
G/L on Budget
Actual Cost
Earned Value
Budget
Hours Worked
Budget Rate
Life to date EQUIPMENT COST REPORT SUMMARIZED BY PRINCIPAL COST TYPE
Rate per hour
TOTALS
Equipment Category/Class
Unit 0703
Owning costs
Operating costs
Fuel
Contribution to overhead
Generate earned value budgets for at least 4 principal cost types. Compare these with actual costs in each principal cost type.
“Vertical slicing” P 212
Rate Splits.
Unscrambling the Account
Unscrambling the AccountVertical slicing.
Manage by category and cost type
Each category, class and cost type looks after itself.
No cross subsidizing between categories, classes and cost types.
Constant Repairs FuelA1 1A1 1A1 1A1 2A1 2A1 3
B A V B A V B A V B A V B A V B A V
A2 1A2 2A2 2A2 3
B A V B A V B A V B A V B A V B A V
C4 1C4 1C4 1
B A V B A V B A V B A V B A V B A V
D7 1D7 1D7 2D7 2
B A V B A V B A V B A V B A V B A V
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
A1
A2
C4
D7
Owning OHDCat ClassOperating
Total
5. Unscrambling the accounti. Horizontal slicingii. Rate splitsiii. Vertical slicing
6. Taking actioni. Manage by categoriesii. Manage by linesiii. Actions speak louder than budgets
Unscrambling and Balancing Your Equipment Account.
Taking ActionManage by categories.
When someone shouts
FIRE
know which door to take.
62
Know where the problems are – there is no need to guess
Figure 12.6 A concise standardized and well understood cost report facilitates a review of budget performance. It should give dollar values to show the magnitude of the issues as well as hourly
rates.
B C D E F G H I
1
2 EX M PERIOD
3
Budget Actual Act/Bud %
5 $13.78 3,721 $51,275 $60,200 ($8,925) $13.78 $16.18 117.4%
6 $24.97 3,721 $92,913 $88,600 $4,313 $24.97 $23.81 95.4%
7 $14.87 3,721 $55,331 $60,750 ($5,419) $14.87 $16.33 109.8%
8 $2.80 3,721 $10,419 $11,461 ($1,042) $2.80 $3.08 110.0%
9 $56.42 $209,939 $221,011 ($11,072) $56.42 $59.40 105.3%
4
Life to date
Rate per hour
Owning costs
Operating costs
Fuel
Contribution to overhead
Actual CostG/L on Budget
TOTALS
Budget Rate
Hours Worked
Earned Value Budget
A
EQUIPMENT COST REPORT SUMMARIZED BY PRINCIPAL COST TYPE
Equipment Category/Class
Unit 0703
P 213
Taking ActionManage by categories.
Differentiating between volume variances and buying variances assists in analyzing equipment budgets because:
Owning cost variances are mostly volume variances based on the fact that the owning-cost rate (designed to cover costs such as depreciation, loans, leases, insurance and property taxes) is largely predetermined and the only uncertainty is the volume – or hours – of work performed by the machine;
Operating cost variances are mostly buying variances due to the fact that costs such as fuel, ground engaging tools, maintenance and repairs are mostly variable and depend on the actual cost of the resources used.
Taking ActionManage by categories.
P 207
Taking ActionManage by categories.
Volume variance.
Buying, operation, over application or waste.
Age, operation or over application.
Buying or waste.
Constant Repairs FuelA1 1A1 1A1 1A1 2A1 2A1 3
B A V B A V B A V B A V B A V B A V
A2 1A2 2A2 2A2 3
B A V B A V B A V B A V B A V B A V
C4 1C4 1C4 1
B A V B A V B A V B A V B A V B A V
D7 1D7 1D7 2D7 2
B A V B A V B A V B A V B A V B A V
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
A1
A2
C4
D7
Owning OHDCat ClassOperating
Total
Taking ActionManage by categories – zoom up.
Figure 12.7
Units above the line have a positive owning cost variance and are well utilized. Units to
the right have a positive owning cost variance and are operating within budget.
($12,000)
($8,000)
($4,000)
$0
$4,000
$8,000
$12,000
($12,000) ($8,000) ($4,000) $0 $4,000 $8,000 $12,000
G/L
: Ow
nin
g C
ost
Bu
dg
et
G/L: Operating Cost Budget
Category EX : Class M
EX M
0605
0701
0702
0703
0801
0802
0803
0804
Well utilizedExpensive to operate
Under utilizedEconomical to operate
Under utilizedExpensive to operate
Well utilizedEconomical to operate
THE RATE
Existing
Company Rates
Published Standards
Current
Equipment Costs
Theoretical Calculations
The
Construction Market
The
Business Climate
P 60
Taking ActionManage by categories – baseline your rates.
Taking ActionManage by lines – zoom even higher. Figure 12.8
Fleet revenue must exceed $2,250,000 in order to recover the fixed and variable costs of
owning and operating the fleet.
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000
Co
st
or
Re
ve
nu
e
Fleet Revenue
Fleet Fixed and Variable Costs
Break even
68
Budgets, budgeting and cost control are important. But actions speak louder than budgets and get the job done. Nothing is achieved by walking up to the plate, kicking off the dust and staring firmly at the score board while the umpire calls “Play Ball”
Keep your eye on the ball not the scoreboard
This won’t win the game – no matter how often you look at it !
P 225
Taking ActionActions speak louder than budgets.
1. Equipment Managementi. Why is it so fascinatingii. What do we do
2. The Ratei. Know it is a transfer priceii. Focus on costiii. Resolve the language issue
Unscrambling and Balancing Your Equipment Account.
3. Equipment Costsi. Owning costsii. Operating costsiii. The rate calculation
4. Equipment costingi. Equipment vs. job costingii. Understand variances
Unscrambling and Balancing Your Equipment Account.
5. Unscrambling the accounti. Horizontal slicingii. Rate splitsiii. Vertical slicing
6. Taking actioni. Manage by categoriesii. Manage by linesiii. Actions speak louder than budgets
Unscrambling and Balancing Your Equipment Account.
Manage by categories.
When someone shouts
FIRE
know which door to take.
Unscrambling and Balancing Your Equipment Account.
73
Owning and Operating costs
Owning costs Operating Costs
Fuel $14.87
Wear parts $6.24
Tires $2.61
P. M. $4.16
Repair parts and labor $11.96
Depreciation $8.75
Interest $2.23
Licenses, insurance etc. $2.80
$56.42 per hour
$39.84$13.78
Only at 5yrs and 10,000 hours
And $2.80 to the overhead account
Rate Splits.
Unscrambling and Balancing Your Equipment Account.
74
Know where the problems are – there is no need to guess
Figure 12.6 A concise standardized and well understood cost report facilitates a review of budget performance. It should give dollar values to show the magnitude of the issues as well as hourly
rates.
B C D E F G H I
1
2 EX M PERIOD
3
Budget Actual Act/Bud %
5 $13.78 3,721 $51,275 $60,200 ($8,925) $13.78 $16.18 117.4%
6 $24.97 3,721 $92,913 $88,600 $4,313 $24.97 $23.81 95.4%
7 $14.87 3,721 $55,331 $60,750 ($5,419) $14.87 $16.33 109.8%
8 $2.80 3,721 $10,419 $11,461 ($1,042) $2.80 $3.08 110.0%
9 $56.42 $209,939 $221,011 ($11,072) $56.42 $59.40 105.3%
4
Life to date
Rate per hour
Owning costs
Operating costs
Fuel
Contribution to overhead
Actual CostG/L on Budget
TOTALS
Budget Rate
Hours Worked
Earned Value Budget
A
EQUIPMENT COST REPORT SUMMARIZED BY PRINCIPAL COST TYPE
Equipment Category/Class
Unit 0703
P 213
Manage by categories.
Unscrambling and Balancing Your Equipment Account.
Horizontal slicing.
Total1
2
3
4
5
6
34
35
36
37
123
124
125
234
235
236
237
Budget Actual Variance
All costsAll units
If you have
enough things
then on the
average the
average will
be average.
Unscrambling and Balancing Your Equipment Account.
Vertical slicing.
Manage by category and cost type
Each category, class and cost type looks after itself.
No cross subsidizing between categories, classes and cost types.
Constant Repairs FuelA1 1A1 1A1 1A1 2A1 2A1 3
B A V B A V B A V B A V B A V B A V
A2 1A2 2A2 2A2 3
B A V B A V B A V B A V B A V B A V
C4 1C4 1C4 1
B A V B A V B A V B A V B A V B A V
D7 1D7 1D7 2D7 2
B A V B A V B A V B A V B A V B A V
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
Budget Actual Variance
A1
A2
C4
D7
Owning OHDCat ClassOperating
Total
Unscrambling and Balancing Your Equipment Account.
Manage by categories – zoom up. Figure 12.7
Units above the line have a positive owning cost variance and are well utilized. Units to
the right have a positive owning cost variance and are operating within budget.
($12,000)
($8,000)
($4,000)
$0
$4,000
$8,000
$12,000
($12,000) ($8,000) ($4,000) $0 $4,000 $8,000 $12,000
G/L
: Ow
nin
g C
ost
Bu
dg
et
G/L: Operating Cost Budget
Category EX : Class M
EX M
0605
0701
0702
0703
0801
0802
0803
0804
Well utilizedExpensive to operate
Under utilizedEconomical to operate
Under utilizedExpensive to operate
Well utilizedEconomical to operate
Unscrambling and Balancing Your Equipment Account.
Unscrambling and Balancing Your Equipment Account.
You do job costing to give you the actionable information you need to manage operations and provide accurate job costs for competitive bidding.
You do equipment costing to give you the actionable information you need to manage operations and provide accurate equipment costs for competitive bidding.
Equipment vs. job costing.
THE RATE
Existing
Company Rates
Published Standards
Current
Equipment Costs
Theoretical Calculations
The
Construction Market
The
Business Climate
P 60
Manage by categories – baseline your rates.
Unscrambling and Balancing Your Equipment Account.
Chapter 1 Equipment management
Chapter 2 Organization
Chapter 4 The rate calculation
Chapter 5 Owning costs
Chapter 6 Operating costs
Chapter 9 Performance measures
Chapter 12 Budgets and budgeting
For all the background, go to:
www.cempcentral.com or, come to the CEMP.
Unscrambling and Balancing Your Equipment Account.