Download - CFMA 2010 Unscramble and Balance Your Equipment Account

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


3. Equipment Costsi. Owning costsii. Operating costsiii. The rate calculation

4. Equipment costingi. Equipment vs. job costingii. Understand variances


5. Unscrambling the accounti. Horizontal slicingii. Rate splitsiii. Vertical slicing

6. Taking actioni. Manage by categoriesii. Manage by linesiii. Actions speak louder than budgets


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.


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



Fleet and Asset

Management


These ensure that you have the right equipment in the right place at the right time

P 3


Compliance and Risk

Management



Fleet and Asset

Management


You rely on these

functionsLong term decisions

The Site sees these functionsShort term decisions


Logistics


Compliance and Risk

Management



Fleet and Asset

Management


MechanicalTechnical hands on

“Field”

Administrative

Clerical Strategic“Office”

Skills, aptitudes and attitudes


Logistics


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


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



You need to recover these costs

• At a constant rate


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

24

The costs associated with owning a machine and keeping it in your fleet.

Equipment CostsOwning costs.

25

You will experience owning costs






Costs - Charges


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.


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 ?


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.


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


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.


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.


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


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


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


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


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.


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



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






5 Effective hours when sold 1 X (.6 X 2 + .4 X 3) 9,600 hours See Section 5-1


































P 53


43






5 Effective hours when sold 9,600 hours See Section 5-1


































20 + 24 + 28 + 32 + 34

P 53


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.

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


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






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.


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

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



Fuel $14.87

Wear parts $6.24

Tires $2.61

P. M. $4.16


Depreciation $8.75

Interest $2.23


$56.42 per hour

$39.84$13.78



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


C4 1C4 1C4 1


D7 1D7 1D7 2D7 2








A1

A2

C4

D7

Owning OHDCat ClassOperating

Total

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


Actual CostG/L on Budget

TOTALS

Budget Rate

Hours Worked

Earned Value Budget

A

EQUIPMENT COST REPORT SUMMARIZED BY PRINCIPAL COST TYPE


Unit 0703

P 213


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.


P 207


Volume variance.

Buying, operation, over application or waste.

Age, operation or over application.

Buying or waste.



A2 1A2 2A2 2A2 3


C4 1C4 1C4 1


D7 1D7 1D7 2D7 2








A1

A2

C4

D7


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.

Manage by categories.

When someone shouts

FIRE

know which door to take.


73



Fuel $14.87

Wear parts $6.24

Tires $2.61

P. M. $4.16


Depreciation $8.75

Interest $2.23


$56.42 per hour

$39.84$13.78



Rate Splits.


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


Actual CostG/L on Budget

TOTALS

Budget Rate

Hours Worked

Earned Value Budget

A

EQUIPMENT COST REPORT SUMMARIZED BY PRINCIPAL COST TYPE


Unit 0703

P 213

Manage by categories.


Horizontal slicing.

Total1

2

3

4

5

6

34

35

36

37

123

124

125

234

235

236

237


All costsAll units

If you have

enough things

then on the

average the

average will

be average.


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.



A2 1A2 2A2 2A2 3


C4 1C4 1C4 1


D7 1D7 1D7 2D7 2








A1

A2

C4

D7


Total


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



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.


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.


Download - CFMA 2010 Unscramble and Balance Your Equipment Account

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