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How To: Manage Depletion
1. BackgroundOne common way to acquire wood is to pay a an upfront amount (or lump sum) for the timber on the certain block of land. This is often the case when land and timber rights are privately owned and sold to timber buyers. For example, a company may pay $60,000 for the right to harvest the timber from XYZ block. In this case, companies will usually record for the up front payment as an asset when the initial payment is made and then record a depletion expense pro rata with the loads as the wood is delivered. In our example, if the block is expected to produce 600 MBF, the company might charge an expense of $100/MBF (=$60,000 / 600 MBF) as the loads are delivered.
The Logger's Edge has two alternative functions for treating the payment of lump sums and then accruing depletion on deliveries. The first method involves developing a budget for the block and setting depletion rates to match the calculated lump sum payment for the block. The second method is less involved and allows you to simply set up depletion rates and track them against your lump sum amount.
I. Steps Involved - Alternative I - Budget Version
I.1 Set Cruise & Depletion Flags
In the Basic Setup Window, the flags 'Enable Cruise' and 'Enable Depletion' need to be turned on.
Setting the cruise flag will enable an additional form as part of the block set up.
Setting the Depletion flag will also make the 'Budget' button visible on the cruise form.
I.2 Enter Cruise Volumes
In the block setup wizard you enter your cruise volumes (see above). The cruise volumes can be based on species and/or product.
If
you use grade as an attribute of your loads, you can also base your cruise
on grade as well.
The volumes do not have to be in the same unit (say MBF), but can be mixed. As shown in the window grid, saw logs are cruised based on MBF, but pulp is cruised based on cords.
I.3 Build Block Budget
Once you have entered your cruise volumes, click on the 'Budget' button to bring up the budget worksheet:
In the budget worksheet, you develop a budget for the block based on your expected cruise volumes, your harvesting & hauling rates, and your expected delivered prices. This worksheet allows you to build up an expected profit for each segment of your cruise. You can use this worksheet to develop your bids for a block -- the worksheet calculates the maximum you should be willing to pay for a block of land.
In the worksheet, you enter your depletion rates for each of the cruise segments. Basically, this allows you to deplete your block at different rates depending on the characteristics of the wood on the block. Note that your depletion rates are based on the same unit of measure as your cruise. In the example above, the depletion rates for saw logs are based on MBF, but the depletion rate for pulp is based on cords.
In building your budget worksheet you should set your depletion rates so that the total depletion (budgeted) charged to the block should match the up front lump sum payment. These two numbers should match because if the block production exactly matches your budget, the amount of depletion charged will exactly match your lump sum, thereby resulting in a zero balance in the lump-sum asset account when the block is complete.
In order to accrue depletion, you must check the 'Accrue Depletion' check box.
Click OK when your depletion rates are set.
I.4 Behind the Scenes
When you save your block, the The Logger's Edge will create a pay contract and pay contract rates for the depletion activity:
There will be a pay rate for each cruise segment. Each rate will have all the attributes (species, product, grade) that are specified for each cruise segment.
The pay contract will set the vendor (who should be paid) to your own company. In effect, you will be charging yourself for depletion.
The
'DEPLETION' pay activity is fixed and must not be changed.
As you can see, the depletion amounts are charged on each load, where the rates vary by species, product, grade, etc.
The field 'PAY_ACTIVITY_CODE' on the Table 'PAY_CONTRACTS' (not RATES) is set to 'DEPLETION' when this first method is used. This setting prevents the depletion rates from showing up in the rates grid for contractors. In the second method, this field is set to 'NONE', as it is for all other pay contracts. This setting allows depletion rates to be show along with other pay rates for other activities. In both cases the 'PAY_ACTIVITY_CODE' on the Table 'PAY_CONTRACT_RATES' is set to 'DEPLETION'
II. Steps Involved - Alternative II - Pay Contract Version
II.1 Set Cruise Flag
In the Basic Setup Window, the flag 'Enable Cruise' needs to be set. The 'Enable Depletion' flag needs to be turned OFF.
Setting the cruise flag will enable an additional form as part of the block set up.
II.2. Enter Cruise Volumes (Optional)
Like the first method, you can enter your cruise volumes (see above). The cruise volumes can be based on species and/or product.
If
you use grade as an attribute of your loads, you can also base your cruise
on grade as well.
The volumes do not have to be in the same unit (say MBF), but can be mixed. As shown in the window grid, saw logs are cruised based on MBF, but pulp is cruised based on cords.
This step is optional because your depletion rates are not tied to the individual cruise segments. That is, this alternative allows you to set up depletion rates separate and apart from your cruise.
II.3. Depletion Rates
Unlike the first depletion method, unchecking the 'Enable Depletion' flag will disable (make invisible) the 'Budget' button on the cruise form.
So where do I enter my depletion rates?
The answer is: You set up your depletion rates just like you would set up a pay rate for any other activity or phase:
Go to the wizard window that has your pay rates for contractors. You can enter your depletion rates just like any other rate, but where you set your own company as the contractor. The pay Activity must be set to DEPLETION. Once you have set up your rates, they are applied just like any other pay rates.
One
big advantage of managing your depletion rates separate from your cruise is
that you can set depletion rates using a pay basis that is not the same as
the basis for your cruise. For example, suppose you cruise your pulp
wood in cords, but want to charge depletion based on tons. You cannot
do this under the first alternative, but you can can do in this (the second)
alternative. You would just set your rate on a pay basis to TON
instead of Cords.
II.4. Enter Lump Sum
The final step in the process is to enter your up front lump sum. In the first alternative above, the lump sum is entered in the block budget worksheet. In this alternative, the lump is entered on the next to last page of the block setup wizard:
The lump sum amount is the amount upon which your depletion is based, and against which you will compare your depletion charges at the completion of the block.
Technical note: The lump sum entry is in the database field 'LUMP_SUM' and may need to be enabled by a Caribou support representative.
III. Run Vendor Calculator
Once your rates are setup, your depletion is calculated when you run the vendor calculator.
This
is the same under either method by which your depletion rates are set up.
The calculator creates a regular vendor statement, with the exception the vendor is your company. For example, in the screen below there is a vendor statement where the vendor is 'Blue Ridge Timber' -- the company that is set up as My Company.
As you can see, the depletion amounts are charged on each load, where the rates vary by species, product, grade, etc.
IV. Reports
The depletion charges are shown in the block P&L:
The basic P&L shows the profit for the block, after deduction of the accrued depletion (see row 22). The profit is also shown without the depletion charge, but with a deduction for the lump sum amount. This second profit number shows the profit for the block is the accrued depletion charges exactly matched the lump sum amount.
The importance of this second profit number is that (when the block is complete) it will be higher than the profit when the calculated depletion charge is greater than the lump sum amount -- indicating that your production has exceeded your expectations and have 'over-accrued' depletion, which is a good thing, because your true depletion expense is capped at the total of the lump sum amount. Conversely, if it is lower (when the block is complete) it means your production is less than your cruise, indicating that you paid too much for the timber, which is a bad thing L.
The report also shows the percent of the cruise that has actually been produced. Thus, in the report above, we can see that the block is 24.06 percent complete (based on our cruise being correct).
The cruise volume report provides a reconciliation of your cruise with your actual production:
The report shows:
- Cruise Volume: The Cruise you initially entered
- Measure: the unit of measure for the cruise
- Acc Record Volume: Delivered volume
- Depletion Rate (Calc): The total depletion charges divided by the delivered volume. This rate should match the depletion rate charged for the cruise segment
- Depletion Amount: Accrued depletion charged on the delivered volume
- Remaining volume: Difference between the cruise volume and the record volume. This should indicate the remaining timer to be harvested.
- Remaining Depletion Amount: The remaining volume multiplied by the depletion rate. This indicates the remaining amount to be depleted.
- Remaining Percentage: The percentage of the cruise remaining to be harvested.
The primary importance of this report is to allow you to monitor your depletion charges against your lump sum. As noted above, when you depletion charges exceed your lump sum, you have made a good deal -- your actual production has exceeded your anticipated (cruise) volume.
