Calculating Machinery Operating Costs Ian Yule, 138.255 A summary of sections 9-13.
Machinery costs When planning we need: An accurate method of calculating the cost of owning machinery. The comparative cost of different machine combinations. The comparative cost of getting the work done through means that do not include ownership To know the effective work we are getting from machinery. The ability to calculate costs per hour and per hectare. The capacity we need to carry. What are the timeliness costs from not being able to get the job done and what are the risks of overcapacity.
Cost Components Interest on Capital Depreciation Tax Insurance and Housing Repair and Maintenance Fuel Labour Fixed Costs Variable Costs Fixed: because they are fixed regardless of the level of use. Variable: Because they vary with the level of use. Include labour because we may be comparing machines of different capacity.
The Importance of Planning When buying machinery, planning is important in order to be able to tailor payments to the business cash flows. Seasonal payments for different client groups, dairy, sheep and beef, cropping and contractors. Most finance companies will use individual contracts but bulk purchase can be advantageous. Special deals with low interest may be less flexible in terms of payment schedules. Many appear to prefer to buy as opposed to lease, especially if they have their own maintenance facilities.
Interest on Capital Always use an interest rate because even if we do not borrow money to finance purchase then we could have investment interest on the money. This is termed an opportunity cost. Remember this is an interest only calculation. In reality a farmer or contractor is likely to pool this funding, but we still need to allocate costs to individual machines.
Depreciation Reasons: Reduction in machine performance due to worn parts. Increase in cost for the same unit of output, due to increase in power consumption, labour or repair cost. Obsolescence Change in farm enterprise so current machinery capacity becomes inappropriate. Methods of Calculation. Straight Line: fixed amount depreciated every year. Simple if considering having the asset for a longer period. Fixed Percentage (diminishing balance): More accurately reflects the value of the asset throughout its life. Useful when looking at ownership alternatives. Geometrically Adjusted Diminishing Balance: The most accurate, reflects the initial drop in value of the asset.
Value $ Value $ Depreciation Tractor Value $ (P.P. $120,000) Straight line probably overestimates value until the end of the machine s 120000 life. 100000 GADB has a significant drop in value as soon 80000as the machine is purchased. 60000 DB does not reflect initial drop in value but does 40000 value machine less than straight line. 20000 120000 Tractor Value $ (P.P. $120,000) 100000 80000 60000 40000 20000 0 2007 2008 2009 2010 2011 2012 2013 Year GADB Straight Line DB One of the problems you may encounter is that real depreciation is not 0 adequately reflected by IRD rates. Actual value is likely to be less than 2007 2008 2009 2010 2011 2012 2013 IRD allow you, especially for specialised items. Year $20,000 difference GADB Straight Line DB IRD
Tax and Insurance Licence costs and Insurance. Find out actual costs or use a percentage (typically 1.5 % of new purchase price). Insurance is usually required when purchased on Hire Purchase. Housing and Shelter Many suggest that a housing cost should be included, can be done where appropriate. In terms of depreciation, repair and maintenance it certainly helps to keep machinery inside and out of the weather, for some machinery this should be regarded as essential.
Variable Costs Repair and Maintenance Repair and Maintenance costs can be highly variable and unpredictable for individual machines. As machines get older then clearly they are likely to need more repairs. Standard methods use the results from surveys to calculate estimated repair and maintenance. The more complex the machine the more likely it is that costs will increase as the machine gets older. The most common way to express it is as a cumulative cost through the life of the machine. The equation used to calculate cost is: TAR RF1 Accumulated 1000 Hours RF2 TAR = Total Accumulated Repair and Maintenance cost NB. RF1 and RF2 are standard factors for most categories of machine published by ASABE.
Percentage of Purchase Price Annual Repair and Maintenance Cost Expressed as a Percentage of Purchase Price. Annual Repair and Maintenance costs asa % of P.P. 14% 12% 10% 8% 6% Tractor Used for 1000 hours Roller Packer 200 hours per annum 4% 2% 0% 1 2 3 4 5 6 7 8 9 10 Year Tractor Roller Packer
Fuel Need to calculate fuel consumption as it depends on the level of use and the way the machine is driven. Fuel consumption can be expressed as: Specific Volumetric Fuel Consumption (SVFC) expressed in units of l.kwh -1 (Litres per kilowatt hour). Typical range is 0.24 to 0.57 l.kwh -1. Can also be expressed as: The Specific Volumetric Fuel Efficiency (SVFE), in units of kwh.l -1 (Kilowatt hours per litre). Typical range is 2.36 to 4.1 kwh.l -1. The standard equation to calculate SVFC use is: 2.64X 3.91 0.203 738X 173 Where X is the ratio of equivalent PTO power to rated PTO power
Fuel use litres per hour Bailey has used the same formula assuming the ratio (X) is 0.45 Tractor Fuel Use litres per hour 100 90 80 70 60 ASABE 0.45 Bailey 50 40 30 20 104 120 140 225 320 375 Rated PTO power
load in % of torque at rated engine speed engine power in % of power at rated engine speed Engine Performance Map of Agricultural Tractor Engine Performance Zetor 7211 160 140 120 100 80 216 220 225 230 214 213 212 211 g/kwh B 100 80 60 240 250 260 A 60 40 20 280 300 350 400 40 20 0 30 40 50 60 70 80 90 100 110 120 engine speed in % of rated engine speed
Longitude Longitude Effect of Improving Operational Settings on Cost 54.80 54.75 Quarry Field Costs [ /ha] 54.80 54.75 Welton Field 16.00 54.70 15.00 14.00 54.70 54.65 13.00 54.60 12.00 11.00 54.65 54.55 10.00 54.60 9.00 54.50 8.00 7.00 54.55 54.45 6.00 54.50 54.40 59.30 59.35 59.40 59.45 59.50 59.55 Latitude 59.45 59.50 59.55 59.60 59.65 Latitude Better setting of machine leads to a 35% reduction in operating cost, through higher output and reduced fuel use
Points to consider Again standard figures are the result of surveys. So there are ways to improve performance. Interest in recording fuel use, Used to happen but we haven t worried while we had cheap energy but now people are more concerned. Fuel consumption figures from tractor manufacturers. Selection of tractor with particular reference to transmission system and tasks to be completed. Setting of machinery can a make a big difference. Matching machinery to tractor. The Gear Up and Throttle Down message is perhaps an oversimplification.
Labour When comparing systems we put in labour costs because a larger capacity machine will have lower labour charges per unit of area. Need to work out machinery capacity. In order to calculate cost on the basis of $ per hour or $ per hectare. Machine operating speed and field efficiency Contractors may also have to consider travelling time etc. Typical Field efficiencies. % Ploughing 75-85 Fertiliser Broadcasting 45-55 Spraying 55-65 Harvesting 65-75
$ per Hour Putting it all together 100 kw Tractor (cost $120,000 and used for 1,000 hours per year) 5 furrow plough ($35,000 used for 300 hours a year. Interest rate 8%) 160 140 120 100 80 60 40 20 0 Machinery Yearly Operating Cost 2007 2008 2009 2010 2011 2012 2013 Year Because of the way we have calculated depreciation, we have very high cost in the first year. Machinery Yearly Operating Cost After first year cost relatively stable. In 2010 the machinery cost us $64 per hour to operate.
$ per Hour Putting it all together Hourly cost of ploughing 100 kw Tractor (cost $120,000 and used for 1,000 hours per year) 5 furrow plough ($35,000 used for 300 hours a year. Interest rate 8%) Average Operating Cost 160 140 120 100 80 Slightly different, this is the average cost throughout the machines life. In 2010 this machinery has cost us an average of $82.50 per hour over the 4 years. Average Operating Cost 60 40 20 0 2007 2008 2009 2010 2011 2012 2013 Year
From cost per hour to cost per hectare. Need to calculate work rate. 5 furrow plough, 16 furrows (0.4m), plough width 2m. Field Efficiency 80%. Ploughing speed 7.5kmh -1 Farm situation Output = speed x width x efficiency = 7500 x 2 x 0.8 = 12,000m 2 = 1.2 ha per hour. Contractor who has to travel. Field efficiency 60% Output = 7500 x 2 x 0.6 = 0.9 ha per hour. Assume an hourly charge rate of $100 per hour. Achieving 80% field efficiency, actual cost = $125 per hectare. 60% field efficiency, actual cost = $167 per hectare.
Tractor Operating costs. (Including Labour) Keeping a tractor for 3 years. 1000 hours per year. Average hourly operating cost = $65.85 Highest Dep. $19.88 Labour $18 Fuel $16.59 Hourly Operating Costs 18 Depreciation 19.88 Interest R&M Insurance & Tax Fuel Labour Keeping tractor for 7 years. Average hourly operating cost = $56.30 Highest Labour $18.00 Fuel $16.59 Dep. $11.49 18 16.59 16.59 8.50 1.08 1.80 11.49 5.91 2.52 1.80 Depreciation Interest R&M Insurance & Tax Fuel Labour
Tractor Operating costs. (Including Labour) 600 hours Keeping a tractor for 3 years. 600 hours per year. Average hourly operating cost = $85.53 Highest Dep. $33.13 Labour $18 Fuel $16.59 16.59 18.00 3.00 0.65 14.16 33.13 Depreciation Interest R&M Insurance & Tax Fuel Labour Keeping tractor for 7 years. Average hourly operating cost = $68.09 Highest Dep. $19.14 Labour $18.00 Fuel $16.59 18 16.59 3.00 1.51 19.14 9.84 Depreciation Interest R&M Insurance & Tax Fuel Labour
Conclusions Planning is essential. Number of machines and capacity. Replacement period. Planning finance. Flexibility and cash flow These methods estimate cost rather than give a definitive answer. For example depreciation on big ticket items can be difficult to predict. Fuel and Labour are important costs. Training and driver education. Properly matching machine to tractor. Ballast and tyres. Clearly the shorter the ownership period and the fewer hours worked fixed cost can very quickly get out of control.
Sources of Information Most of the work you have seen is based on the ASABE Standards. These contain standard figures to use for R&M, Depreciation etc. Some information will be provided on NZCPA Website. http://www.nzcpa.com Bailey FAR CD ASABE American Society of Agricultural and Biological Engineers