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This article was originally published in the Fall 2016 issue of Truck Logger BC Magazine.
In part two of this four part series, I am focusing on your overhead and input costs. These are the parts of the model we commonly see when a client brings a rate model to us that they have prepared at home. These are the hard costs of operating your equipment and the real costs that you pay out of your pocket to keep the machine moving. These costs are essential to the day-to-day operation of your equipment and usually cannot be cut completely. As such, we stress the focus for these costs should be on increasing efficiency.
These costs will vary depending on the type of equipment you are building the model for. For example, a steep slope harvester will have a far different set of unique costs than a rock drill or a grapple yarder may have. However, the base underlying model and input costs remain the same - fuel, maintenance, major overhauls, etc.
In part one of the series, we discussed depreciation and amortization and the effect it can have on your rate model as well as spoke to the useful life of the equipment. The useful life of the equipment is required when figuring out your overhead and input costs, as some costs may be extended over the life of the equipment as a consumable expense. For instance, fuel or others such as major overhauls may be only triggered at a certain stage of the equipment’s use.
The list of expenses to consider in a rate model is endless, but here are some of the common costs to consider:
Applies to: Steep slope harvesters, grapple yarders and any other line based equipment. Factors to consider: When it comes to rigging and wire you need to know how many feet and what additional rigging is required. You also need to consider how often will the wire and rigging need to be replaced?
Applies to: All equipment Factors to consider: When it comes to fuel, you need to know the fuel consumption of the equipment and what your cost for fuel is going to be on the job site. You also need to be mindful of the volatility of fuel prices and factor in a cushion or negotiate a surcharge or rate change clause based on fuel price.
Applies to: All equipment Factors to consider: With maintenance you need to consider how often and what types of maintenance are required. The other thing to consider is the effects of a poor maintenance schedule and how that could increase costs to run the equipment down the
road, decreasing overall profitability.
Applies to: All equipment Factors to consider: With major overhauls, a business owner needs to consider the wear and tear on equipment, how rough are their operators on the equipment and can processes be put into place that reduce strain and increase major components lifespan. Break the equipment apart and consider the life of each major part without an overhaul. How does this compare to the useful life of the equipment? This allows you to factor in how many times this type of major overhaul will occur. Is it every 5,000 hours? Maybe every 10,000. Each part will have a different lifespan which can be decreased or increased based on maintenance and operating habits. You will need to factor in the costs of each major overhaul required to get the full useful life from the equipment into your rate model.
Applies to: All equipment Factors to consider: Who’s doing the major overhauls and maintenance? Do you have a company mechanic working for you? What are their costs? Or will you send it back to the equipment dealer for work? What is there hourly rate? Think about these questions when you’re building your model.
Other costs commonly seen in the rate model or costs that almost all equipment require would include costs such as low bedding, accessories to outfit the equipment such as fire protection, first aid and other safety gear. These costs would normally be prorated over the course of the equipment’s useful life. These expenses are but a starting point for a generic rate model and do not encompass all the expenses of operating equipment in the industry. However by including them in your model you will have a great starting point to customise the model further.
Stay tuned for Part Three: Labour and Profit in the winter addition of TLA Magazine.
To learn more, contact Chris Duncan, CPA, CA, at 250.856.2443 or
[email protected], or your local MNP Advisor
Related Topics:Scientific Research and Experimental Development; Small Business; Corporate Tax
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