How To: Manage Equipment Costing


1.  Background

The Logger's Edge allows you to manage your equipment costing based on a standard equipment costing methodology.  Each company-owned equipment unit is assigned a per hour standard cost.  When you cost out a block, this hourly standard cost is multiplied by the number of production hours performed by that equipment unit in the block.  Note that this is quite different than using your actual equipment costs -- meaning your actual expenditures for fuel, lubricants, parts, belts, interest, rent, etc -- that are expended on the machine white it is working a specific block.  The standard cost approach takes all the expenditures for the year and divides them by the total production hours to determine an average hourly cost of operating the equipment.  In essence this approach allocates all equipment costs -- operating expenses, ownership costs, insurance, deprecation, etc -- across blocks by the number production hours in each block.

In The Logger's Edge there two types of standard cost: (1) the standard cost with operator, generally referred to as the all found or fully founded rate; and (2) the the standard cost without the cost of the operator, generally referred to as the dry rate.  In the case of the fully founded rate, an estimate of the cost of employing an operator is incorporated in the standard cost and the actual cost of employing your actual operator is ignored for block costing.  In the latter case of the dry rate, the equipment cost on a block is the sum of the equipment cost plus your actual payroll costs for employing your operators.

The basic premises utilized by The Logger's Edge are that (1) the standard cost is computed as total equipment costs divided by production hours; and (2) costs are only charged against a block for time that is coded as production time.

2.  Steps Involved

Equipment Cost Worksheet

The equipment cost worksheet (shown below) allows you to build up your standard cost from each of the components.  In the worksheet, the yellow cells indicate those cells that you can enter data and assumptions.  The white cells (with numbers) are calculated values.

The worksheet is split into 5 panels:

A.    Assumptions

  1. Annual Available Hours:  Expected hours for the equipment unit for year
  2. Utilization percent.  The percentage of available hours the unit performs 'production' work
  3. Annual Operating Hours:  Calculated as the product of available hours and the utilization percent.  This value is used in the denominator for the calculation of the average cost per hour.  The concept used here is 'cost per production hour' meaning that all costs related to down time are allocated across production hours.
  4. Interest Rate on Borrowed Capital:  Interest Rate on Debt
  5. Expected Life (Hours):  Expected life (in hours) for the equipment unit.  (Used to determine the expected life of the equipment in years for use in calculating depreciation.)
  6. Salvage Value:  Estimated salvage value for the unit.  You enter the percent; the worksheet applies the percentage to the Purchase Price to determine the salvage dollar amount.
  7. Average Investment:  The average investment is the acquisition cost plus the salvage amount divided by two [ (R16 + R11) / 2].  This is you average capital you have tied up in the equipment unit over its useful life.  In the example above the equipment unit costs $400,000 and has a salvage value of $100,000 (25%), which yields an average investment of $250,000.
  8. Purchase Price:  The purchase price of the equipment.  You can also add additional miscellaneous costs to build up to a total acquisition cost.
  9. Fuel Consumption (Volume / Hour):  Rate of fuel consumed per hour of operation
  10. Fuel Price Per Unit of Volume:  The price per unit of fuel consumed.  (Note: if fuel consumption is in litres, you would enter the litre price; if fuel consumption is in gallons, you would enter the gallon price.)
  11. Machine Years:  Machine life equals the lifetime hours divided by annual hours.
  12. Operating Wage:  Assumed base wage rate for your operator plus your payroll load (your additional company payroll costs) cost.  In the example above, the base wage is set to $25.00/Hour and the payroll load is set at 25% to yield an effective payroll cost of $31.25/Hr.
  13. Insurance (Percent of average investment):  This is the cost of insurance for the equipment unit, expressed as a percentage of you average annual investment.

B.    Ownership Cost

  1. Depreciation:  The depreciation amount per hour equals the depreciation basis (purchase price - salvage value) divided by the lifetime hours.  This calculation assumes a straight-line depreciation method.  [ R27 = (R16 - R11) / R10 ]
  2. Interest on Investment:  This is the annual interest amount divided by annual operating hours.  [R28 = R12 x R9 / R8 ]
  3. Insurance:  This is the insurance percentage multiplied by the average investment divided by annual operating hours: [R29 = R12 x R23 / R8 ]

    The total hourly ownership cost equals the sum of depreciation, interest and insurance.  [R31 = R27 + R28 + R29]

C.    Operating Cost

  1. Operating Wages:  You build up your total hours as the number of days multiplied by the average hourly work day.  This total should match the total annual estimated hours in row 6.  The total hours is then split between straight time and overtime hours.  The overtime factor is assumed to be time and one-half.  In the example above, the wage rate is $25.00 for straight-time and $37.50 for overtime.  The hourly rates are multiplied by the available (not production) hours to calculate the annual direct payroll cost.  The loading factor is applied to the direct payroll cost to calculate the total loaded payroll cost for the year.  This total is then divided by the production (not available) hours to calculate the operator cost per production hour.  In the above example, the direct payroll cost is $62,500.  The payroll load is $15,625 (25% of $62,500), yielding a total payroll cost of $78,125.  The cost for the operator per hour of productive work is $40.69/Hr ($78,125 / 1920).  This value is subtracted from the full founded to cost to compute the "Dry" or standard cost for the equipment without operator.
  2. Fuel Costs per Hour:  This is the product of fuel consumption per hour and fuel price per unit of consumption [R52 = R17 x R18]
  3. Oil and Lube, Including Filters per Hour:  You input a percentage of your fuel costs to estimate this value.  In the example, the value of 7% is entered, which, when multiplied by the fuel cost per hour, yields a value of $1.51/Hr.  You can adjust this percentage to match your actual experience.
  4. Repairs & Maintenance:  There are three rows provided that allow you to enter your estimated annual repairs and maintenance for the equipment unit.  The total for Repairs & Maintenance (R64 = R60 + R61 + R62) in row 64 is then divided by annual hours to calculate the average hourly repairs and maintenance cost. [R66 = R64 / R8]
  5. Operating Supplies:  An annual entry for miscellaneous costs for operating the unit.  The annual amount is divided by the annual operating hours to determine the hourly cost in row 70.

    The total operating costs per hour are the sum of operating wages, fuel, oil & lube, repairs and maintenance, and operating supplies.  [R72 = R49 + R51 + R56 + R66 + R70]

D.    Profit & Risk

    The worksheet also includes an allowance for profit and risk.  The allowance equals a user-input percentage applied to the average investment in the unit (see row 12).  In the example above, a 10 percent entry is applied to an average investment of $250,000 for a profit/risk allowance of $13.02/hr.

E.    Summary.

The total hourly operating costs are summarized in the last section of the spreadsheet.  The total hourly costs (Full Founded Rate) are the sum of the ownership costs (row 31), the operating costs (row 72), and profit & risk (row 77). [R85 = R31 + R72 + R77].  In the above example, the total is $144.58/hr.  This is the Full Rate / Hr and is used for those business reports that rely on the 'Full Founded Rate' to measure equipment costs.

The Standard Cost/Hr is also calculated by the worksheet.  This cost is the cost of operating your machine, NOT including the cost of the operator.  Mathematically, it is calculated as the total in row 85 less the operator's cost in row 49.  In the example, the cost is $144.58 less $40.69, or $103.89.  In reports that rely on this cost measure, the actual cost of your operator is added to the Std Cost to calculate the full cost of operating the equipment unit.

3.  Calculator

The standard cost for your equipment is multiplied by the hours reported on time sheets (employee, equipment and contractor) where the equipment unit is identified.  For example, in the screen below, there are 8.5 hours of Falling for the equipment unit FB02 on block BL-10012.  If the standard cost for the unit FB02 was $125.00/Hr, a total cost of $1,062.50 (=$125 x 8.5) would be charged against the block/job.

This calculation is performed when you run the employee pay calculator.  If you change a time slip, you must rerun the employee calculator in order to make sure the equipment costs are updated.

Only time coded to an activity with a type of 'Production' will be have the standard cost applied.  In order words, only production time will have the standard cost applied.  Time coded as maintenance or non-production will not generate a charge against the block.

If you update a standard cost rate -- for example, at the end of the year you have better information as to maintenance performed on the equipment unit -- you can recalculate your block equipment costs without rerunning all your employee pay calculators.  You can recalculate your equipment costs by selecting Calculators | Recalc Equipment Cost & Tree Volume from the main menu.

This menu item will allow you to apply a new set of rates across any range of time slips.  Thus, if you update your equipment standard costs at the end of a year, you can easily recalculate your block costs to reflect those updated rates.

4.  Reports

There are several reports in The Logger's Edge that make use the equipment cost calculation.

Block Summary P&L

The summary P&L includes the cost of your own equipment as part of the block costs:

The report includes your payroll expenses (with an option of counting payroll based on direct payroll or loaded payroll) and the standard cost of your own equipment.  In this report the dry rate is used for equipment costing

Block Activity Cost Summary, by Actual Volume

The activity cost summary also includes the cost of your own equipment as part of the activity costs:

The reports builds up the cost for performing each phase on a block and then divides the total cost by the production volume in order to summarize the cost on a per unit of production basis.  In this report the dry rate is used for equipment costing.

Block Summary P&L, Fully Founded Cost

This Summary P&L includes the cost of your own equipment as part of the block costs, but uses the full founded standard cost to calculate the cost.

The report excludes your actual payroll expenses as the fully founded standard cost of your own equipment has the cost of the operator embedded in it.  The overall profitability difference between this report and the P&L based on the dry rate will reflect the difference between your actual payroll cost on the block and that embedded in your standard cost build up.

5.  Appendix

Equipment Cost Worksheet - With Formulas

The equipment cost worksheet is shown below where the calculated cells have been replaced with their formulas.  You can use this to see exactly how the spreadsheet works in calculating your costs.


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