Ownership cost

OWNERSHIP COST

Mansoor Azam Qureshi

NUST

Islamabad

April 10, 2023

CATAGORIES OF CONSTRUCTION EQUIPMENT 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.

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COST COMPONENTS IN APRODUCTION UNIT


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OVERHEAD AND PROFIT 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.

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OWNERSHIP COST

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Mansoor Azam Qureshi

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.

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Initial capital cost Depreciation Investment (or interest) cost Insurance cost Taxes Storage cost Salvage value Major repairs and overhaul


OWNERSHIP COST

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INITIAL CAPITAL COST 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


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SALVAGE VALUE 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.

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DEPRECIATION

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.



ASSESSMENT OF DEPRECIATION

Straight-line Depreciation Sum-of-year digits Depreciation. Declining Balance Depreciation. Production Method. Depreciation based on Current Law.


COMPARASON OF DEPRECIATION METHODS

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STRAIGHT LINE METHOD Initial

Investment =$16000 Salvage value =

1000 Life = 5

years Depreciation = (16000 –

1000)/5 = 3000 per yearMansoor Azam Qureshi 12

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SUM OF YEAR DIGITS METHOD

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


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DECLINING BALANCE METHOD

Rate for new equipment = 200%/n =200/5 = 40%

Rate for used equipment = 150%/n= 150/5 = 30%


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INVESTMENT COST 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.


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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


INVESTMENT COSTAVERAGE ANNUAL VALUE


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 2x5Investment cost = 9600x5/100 = 480 per yearAverage annual value when salvage value is available = 16000x(5+1) + 1000x(5-1) = 10000 2x5Investment cost = 10000x5/100 = 500 per year

INVESTMENT COSTEXAMPLE

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INSURANCE, TAX AND STORAGE COST

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.


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MAJOR REPAIR AND OVERHAUL COST


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.


Annual Depreciation Expense

Straight-Line

Depreciation

Units-of-Activity

Depreciation

Sum-of-the-Years'-

Digits Depreciati

on

Double-Declining-Balance

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

Ownership cost

Education

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