cfma 2010 unscramble and balance your equipment account

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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.

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  • 1. Unscrambling and Balancing YourEquipment Account.It need not be a mystery AGC of America CFMAAGC of America CFMAAnnual Construction Financial Management Conference October 2010Mike Vorster.President, CEMPCentral [email protected]

2. Unscrambling and Balancing YourEquipment Account.1. Equipment Management i. Why is it so fascinating ii. What do we do2. The Rate i. Know it is a transfer price ii. Focus on cost iii. Resolve the language issue 3. Unscrambling and Balancing YourEquipment Account.3. Equipment Costs i. Owning costs ii. Operating costs iii. The rate calculation4. Equipment costing i. Equipment vs. job costing ii. Understand variances 4. Unscrambling and Balancing YourEquipment Account.5. Unscrambling the account i. Horizontal slicing ii. Rate splits iii. Vertical slicing6. Taking action i. Manage by categories ii. Manage by lines iii. Actions speak louder than budgets 5. Unscrambling and Balancing YourEquipment Account.For all the background, go to:Chapter 1Equipment managementChapter 2OrganizationChapter 4The rate calculationChapter 5Owning costsChapter 6Operating costsChapter 9Performance measuresChapter 12 Budgets and budgetingwww.cempcentral.comor, come to the CEMP. 6. 6Equipment ManagementWhy is it so fascinating.FinancialOperational Mechanical P1 7. 7 Equipment ManagementSo what do we do. 8. ProductionInterface andLogistics ComplianceField and RiskMaintenanceManagement OperationsAcquisition Shop and and Disposal Yard So. Operations Whatand Fleet dowe do AssetManagement 9. Equipment Management These ensure that you have the right equipment inthe right place at the right time ProductionInterface andThese LogisticsThesegenerate the generate theOwning ComplianceField Operating and RiskMaintenance CostsManagement Operations Costs Acquisition Shop and Yardand Disposal Operations Fleet and AssetManagementP3 10. Equipment Management ProductionInterface andThe Site seesLogistics these functions ComplianceField and RiskMaintenanceShort termManagement OperationsdecisionsAcquisitionShop and Yard You rely on and DisposalOperationsthesefunctions Fleet and Long term AssetdecisionsManagement 11. Equipment Management Skills, ProductionaptitudesInterface andAdministrativeLogisticsand attitudesClerical Strategic OfficeComplianceField and RiskMaintenanceManagement OperationsMechanicalAcquisitionShop and YardTechnical hands on and DisposalOperations Field Fleet and AssetManagement 12. 14 Equipment ManagementSummary of Activity by Function1. Acquisition and Disposal 4. Field Maintenance Operations Specification and selection Fuel Standardization Lubrication and oil analysis OEM NegotiationsCondition assessment DisposalPreventive maintenance Wear parts2. Compliance and Risk Management 5. Shop and Yard Operations Functions Licensing Fabrication Insurance Refurbishment Risks Inspection and authorized repairStorage and inventory control Emissions complianceRepair and rebuild Competencies Taxation and duty Record keeping and work orders3. Production Interface and Logistics 6. Fleet and Asset Management Project planningData analysis Operations analysis Rate calculations Long range fleet planning Economic life and fleet planning Fleet balancing Capital budgeting Dispatch and transportROI and financial analysisClear responsibilities with corresponding authority and accountability can be defined for each ofthe six functions. P5 13. 15The RateA transfer price.FinancialOperationalMechanicalThe Rate 14. 16 The RateYou experience rain You use water In relatively big At a relativly amountsconstant rate At discrete At regular time points in time intervals 15. 17 The RateYou will experience You need to recoverequipment costs these costs In relatively big At a constant amountsrate At discrete At regular time points in time intervals 16. 18 The RateA transfer price.The RateIncome from sale Internal transfer of product price as costProduction goalInternal transfer True cost ofprice as income equipment used Equipment goalReal goalsMutual interdependence P18 17. 19The RateA transfer price or a cost recovery rateA uniform systematic way You experience theseof allowing for the actual costs they occur atcosts you will experienceintervals in relatively large transactionsIncome from saleInternal cost of productrecovery as cost A uniform systematic way ofrecovering the actual costsProduction goal you experience Internal costTrue cost of recovery rateequipment used Equipment goalReal goals Mutual interdependence P18 18. The RateResolve the language issue True Internal Hours Equipment Gain or loss revenue rateXcharged= revenue _ equipment= on equipment costsBudget orHoursActual costs Budget rateXworked= Earned Value _ experienced= Variencebudget Cost recoveryHours CostsCostsOver or under rate Xworked= recovered _ experienced= recovery Your call language can create silos or teams 19. Many Names for the Same ThingIf 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 20. Unscrambling and Balancing YourEquipment Account.1. Equipment Management i. Why is it so fascinating ii. What do we do2. The Rate i. Know it is a transfer price ii. Focus on cost iii. Resolve the language issue 21. Unscrambling and Balancing YourEquipment Account.3. Equipment Costs i. Owning costs ii. Operating costs iii. The rate calculation4. Equipment costing i. Equipment vs. job costing ii. Understand variances 22. 24Equipment CostsOwning costs.The costs associated with owning a machineand keeping it in your fleet. 23. 25 Equipment CostsOwning costs. You will experience You need to recover owning coststhese costs In relatively big At a constantamountsrate At discrete points At regular timein timeintervals Costs - Charges 24. 26Equipment CostsOwning costs.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 asset2. Interest Our investment in equipment must provide a return on the amount we have invested3. 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 likeHave to do withaccounting, finance andadministration. 25. 27Equipment CostsOwning costs.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 assetAnnual or hourly ?2. Interest Our investment in equipment must provide a return on the amount we have investedAnnual or hourly ?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 likeAnnual or hourly ? 26. 28 Equipment CostsOwning costs. Hourly owning costgoes down with age.It depends on the rate at whichresidual market valuedecreases and the number ofhours worked in a year.Owning Cost$18$16 $ per hour$14$12$10 $8 $65000 6000 70008000 9000 Hours Worked 27. 29 Equipment CostsOperating costs. Operating costs - the costs you incur once youturn the key 28. 30 Equipment CostsOperating costs.Interval Cost ofBetween Action Actions 1. Operator ? 2. Fuel 3. Tires/Tracks 4. Ground engaging tools 5. Inspection and PM 6. Repairs 7. Rebuilds 29. 31 Equipment CostsOperating costs. We can calculate - estimate (guess at) - either the intervalbetween actions or the cost of an action for many of thecategories. We are, however very stuck when it comes to parts and labor forrepairs and rebuilds. We know :1. We are talking lots of money.2. Expenditure increases with age.3. Increasing expenditure probablydetermines how long we should keep the machine. 30. 32Equipment CostsOperating costs.1. FuelCost times factor times consumption2. Wear parts (implement)Cost times factor times life3. Tires or tracks (traction) ConstantCost times factor times life4. Preventive maintenanceAnnual orCost times interval hourly ?5. Repair parts and laborThe big uncertainty- comes in chunks- increases with age- dependent on conditionsHave to do with oil, grease, parts and labor in the field. 31. 33Equipment CostsOperating costs. (data)Linear Component of cost Exponential