The High Cost of Equipment and Vehicles
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 $90k to $100k 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
- 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 financing. 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.
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
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
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:
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.