Landscaping equipment - Equipment cost

Equipment cost

Due to the small profit margins on construction projects it is important to maintain accurate records concerning equipment utilization, repairs and maintenance. The two main categories of equipment costs are ownership cost and operating cost.

Ownership Cost

To classify as an ownership cost an expense must have been incurred regardless of if the equipment is used or not. These costs are as follows:

• purchase expense
• salvage value
• tax savings from depreciation
• major repairs and overhauls
• property taxes
• insurance
• storage

Depreciation can be calculated several ways, the simplest is the straight-line method. The annual depreciation is constant, reducing the equipment value annually. The following are simple equations paraphrased from the Peurifoy & Schexnayder text:

m = some year in the future N = equipment useful life (years) and Dn = Annual depreciation amount Dn = purchase price / N Book value (BV) in year m BVm = purchase price - (m x Dn)

example: N = 5 purchase price = $350,000 m = 3 years from now BV3 = $350,000 - ( 3 x $350,000/5) = $140,000

Operating cost

For an expense to be classified as an operating cost, it must be incurred through use of the equipment. These costs are as follows:

F.O.G. fuel lubricants, lube oils, filters (oil, air, fuel, hydraulic), and grease

repairs repair parts repair labor

tires 3rd party service contract replacement of high-wear items

The biggest distinction from a cost standpoint is if a repair is classified as a major repair or a minor repair. A major repair can change the depreciable equipment value due to an extension in service life, while a minor repair is normal maintenance. How a firm chooses to cost major and minor repairs vary from firm to firm depending on the costing strategies being used. Some firms will charge only major repairs to the equipment while minor repairs are costed to a project. Another common costing strategy is to cost all repairs to the equipment and only frequently replaced wear items are excluded from the equipment cost. Many firms keep their costing structure closely guarded as it can impact the bidding strategies of their competition. In a company with multiple semi-independent divisions, the equipment department often wants to classify all repairs as "minor" and charge the work to a job - therefore improving their 'profit' from the equipment.