The high cost of equipment demands that owner-managers have an in-depth understanding of the cost of owning and maintaining specific types of equipment, to ensure that it contributes to a positive return on investment. Factoring the significant costs of equipment ownership into a pricing formula could increase your sales figures and at the same help your business’ management understand where you can reduce present and future costs – and improve your bottom line.
Businesses spend a great deal of time reviewing salary and wages, both to control cost and to determine billing rates when providing estimates or billing clients.
Next to wages, vehicle and equipment ownership and operations are among the higher-expense items within a profit-and-loss statement. Yet, very few businesses monitor the cost of owning and operating vehicles or equipment. Instead, they may simply fold it into the price of doing business without analyzing it further.
Whether your business needs a front-end loader costing just south of $500,000, or a working truck in the $90M to $100M range, analyzing the cost and contributions that these assets make to the business may contribute to a more satisfying bottom line.
To better understand the benefits of job costing each piece of equipment, consider this advice:
- The original cost of the equipment should be prorated over the its estimated useful life. For instance, if a $24,000 piece of equipment has a lifespan of five years or 1,000 operating hours, a business could determine a monthly or weekly cost of $400 or $92 respectively, or $24 per hour.
- You should also expect additional costs when assets are purchased outside your province or country, such as shipping, duty and excise tax and any installation cost. Naturally, these costs will increase the cost base of the asset in the business’ calculations. With this data, you as an owner-manager will be in a better position to consider these costs when using or hiring out your business equipment.
- Ensure that you document any maintenance of the equipment. Recording the cost of an in-house or sub-contracted service, whether for repair or scheduled maintenance, will not only satisfy safety or warranty provisions; it will also help establish the overall cost of operating a machine.
This information in turn provides a basis for quoting jobs, as well as documentation you can use if you’re considering future equipment purchases.
- Consider recording the cost of powering the equipment. Whether the source of power is fossil fuel or electricity, knowing the operation costs is a major consideration in an energy-expensive world.
- Downtime of all equipment should also be recorded. Knowing how many hours equipment is out-of-commission due to mechanical failure is essential to:
- Understand the cost of repairing the equipment.
- Determine the lost opportunity cost because equipment cannot be used.
- Establish whether that brand of equipment meets job requirements.
- Compare the downtime to that of similar equipment, so you can analyze based on hard numbers which is the most reliable or usable piece of equipment.
- Purchasing equipment usually requires Interest is a cost of ownership and, as such, should be recorded for each specific piece of equipment. Factoring interest costs into the operational cost of the equipment forces management to consider whether charge-out rates need to increase, or whether leasing or renting is a better alternative to the cost of ownership.
- Consider extended warranty cost as part of the cost of operating equipment. If extended warranty is included, you as an owner-manager may wish to consider extending the useful life of the equipment to align with the extended warranty period, which will help you cost jobs or hire out equipment.
- Finally, be sure to record revenue earned using the equipment based upon the predetermined hourly charge-out rate. Knowing whether the equipment is paying for itself helps determine whether your business should purchase additional equipment, sell the existing equipment or rent similar equipment in the future.
Establishing an asset-specific costing process is not as difficult as you might think. Most quality bookkeeping systems will have a job-costing module that already allows posting of expenses and/or revenues for reference purposes. If your software does not have this kind of module, you could also build a spreadsheet to record the cost and revenue attributed to specific assets.
The hard part is to ensure that all employees are trained to record the additional required information. For instance, when an in-house mechanic repairs a specific piece of equipment, the time spent on the repair should be documented to allow posting to the job cost for that equipment.
Bookkeepers must also be able to identify the invoice associated with the cost of parts for that specific equipment repair, for their job-cost posting. Each business will need to adapt their procedures to accommodate their software.
Naturally, all the recordkeeping in the world will not benefit the bottom line if management does not review, on a regular basis, the results of their decision to rent or lease an asset.
Reviewing this data allows management to:
- Determine whether usage of equipment dictates that the business will need a replacement earlier than suggested.
- Consider whether the asset is bringing an advantage to the business.
- Compare similar equipment to determine which brand is less costly to maintain in future.
- Determine whether your employees have a possible bias towards a specific piece of equipment that may sway future purchase decisions.
Using a fact-filled approach will help you arrive at decisions about acquiring future equipment to be purchased and related cash-flow requirements. It will also help your business take action to ensure that financial data, corporate records, and lines of credit are up-to-date, so you’ll be able to secure financing for any future replacement assets.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.