Ownership cost

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  • 1. Mansoor Azam Qureshi NUST Islamabad
  • 2.  Small Tools and Consumables.  Blades, drill bits etc  Shared Equipment.  Shared and used over period of time as work progresses. Picks , shovels etc.  Task Specific Equipment.  Costly equipment used for specific work and mobilized for period of work. Excavator, cranes etc. Mansoor Azam Qureshi 21 January 2014 2
  • 3. Mansoor Azam Qureshi 21 January 2014 3
  • 4.    Overhead charges include items such as the costs of operating the maintenance force and facility including  (a) wages of the mechanics and supervisory personnel,  (b) clerical and records support, and  (c) rental or amortization of the maintenance facility (i.e., maintenance bays, lifts, machinery, and instruments). The profit may be expressed as a percentage of total hourly operating costs, which, in turn, may be expressed in cubic yards of material moved or in some other bid-relevant measure. The amount of profit per cubic yard, square foot, or linear foot is a judgment that contractors must make based on their desire to win the contract and the nature of the competition. Mansoor Azam Qureshi 21 January 2014 4
  • 5. Certain costs that accrue whether the piece of equipment is in a productive state or not. These costs are fixed and directly related to the length of time the equipment is owned. Therefore, these costs are called fixed, or ownership, costs. The term fixed indicates that these costs are time dependent and can be calculated based on a fixed formula or a constant rate basis. Mansoor Azam Qureshi 21 January 2014 5
  • 6.  Initial capital cost  Depreciation  Investment (or interest) cost  Insurance cost  Taxes  Storage cost  Salvage value  Major repairs and overhaul Mansoor Azam Qureshi 21 January 2014 6
  • 7.  This cost is incurred for getting equipment into the contractor’s yard, or construction site, and having the equipment ready for operation.  Price at factory (less consumable) $ 80000  extra equipment 0  sales tax and duties 4000  Cost of shipping 2000  Cost of assembly and erection 1000  Initial capital cost 87000 Mansoor Azam Qureshi 21 January 2014 7
  • 8.  Salvage value is the cash inflow a firm receives if a machine still has value at the time of its disposal at a future date.  Machine's possible secondary service applications affect the amount an owner can expect to receive.  A machine having a diverse and layered service potential will command a higher resale value.  Guidance in making salvage value predictions can be fairly easily accessed from auction price books. Mansoor Azam Qureshi 21 January 2014 8
  • 9.  Depreciation represents the decline in market value of a piece of equipment due to age, wear, deterioration, and obsolescence.  Physical deterioration.  Wear and tear of the machine  Economic decline.  Obsolescence. Mansoor Azam Qureshi 21 January 2014 9
  • 10.  Straight-line Depreciation  Sum-of-year digits Depreciation.  Declining Balance Depreciation.  Production Method.  Depreciation based on Current Law. Mansoor Azam Qureshi 21 January 2014 10
  • 11. Mansoor Azam Qureshi 21 January 2014 11
  • 12.  Initial Investment =$16000  Salvage value = 1000  Life =5 years  Depreciation = (16000 – 1000)/5 = 3000 per year Mansoor Azam Qureshi 21 January 2014 12
  • 13.  Initial cost = 16000  Salvage value = 1000  Depreciable cost = 15000  Life = 5 years  Sum of Years = 1+2+3+4+5=15  Depreciation      1st year = 5x15000/15=5000 2nd year= 4x15000/15=4000 3rd year = 3x15000/15=3000 4th year = 2x15000/15=2000 5th year = 1x15000/15=1000 Mansoor Azam Qureshi 21 January 2014 13
  • 14. Rate for new equipment = 200%/n =200/5 = 40% Rate for used equipment = 150%/n= 150/5 = 30% Mansoor Azam Qureshi 21 January 2014 14
  • 15. Investment (or interest) cost represents the annual cost (converted into an hourly cost) of capital invested in a machine .  If borrowed funds are utilized for purchasing a piece of equipment, the equipment cost is simply the interest charged on these funds.  If the equipment is purchased with company assets, an interest rate that is equal to the rate of return on company investment should be charged  The average annual cost of interest should be based on the average value of the equipment during its useful life.  Mansoor Azam Qureshi 21 January 2014 15
  • 16.  Average value of Equipment without salvage value P = IC(n + 1) 2n Average value of Equipment with salvage value P = IC(n+1) + S(n-1) 2n n= life in years S= salvage value Mansoor Azam Qureshi 21 January 2014 16
  • 17. Let us assume that we have a piece of equipment that has an initial cost or base value of $16,000 borrowed at 5% interest and a salvage value of $1,000. The service life is 5 years. Average annual value when no salvage value accrue = 16000x(5+1) = 9600 2x5 Investment cost = 9600x5/100 = 480 per year Average annual value when salvage value is available = 16000x(5+1) + 1000x(5-1) = 10000 2x5 Investment cost = 10000x5/100 = 500 per year Mansoor Azam Qureshi 21 January 2014 17
  • 18.  Insurance cost represents the cost incurred due to fire, theft, accident, and liability insurance for the equipment.  Tax cost represents the cost of property tax and licenses for the equipment.  Storage cost includes the cost of rent and maintenance for equipment storage yards, the wages of guards and employees involved in moving equipment in and out of storage, and associated direct overhead. Mansoor Azam Qureshi 21 January 2014 18
  • 19. Major repairs and overhauls are included under ownership cost because they result in an extension of a machine's service life. They can be considered as an investment in a new machine. Because a machine commonly works on many different projects, considering major repairs as an ownership cost prorates these expenses to all jobs. These costs should be added to the basis of the machine and depreciated. Mansoor Azam Qureshi 21 January 2014 19
  • 20. Annual Depreciation Expense Straight-Line Depreciation Units-ofSum-of-theActivity Years'-Digits Depreciation Depreciation DoubleDecliningBalance Depreciation Year 1 $16,000 $22,000 $26,667 $36,000 Year 2 16,000 14,000 21,333 21,600 Year 3 16,000 18,000 16,000 12,960 Year 4 16,000 16,000 10,667 7,776 Year 5 16,000 10,000 5,333 1,664 $80,000 $80,000 $80,000 $80,000 Mansoor Azam Qureshi 21 January 2014 20