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Interactive Audio Lesson
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Ownership Cost Estimation
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Today, we're focusing on how to calculate ownership costs for construction equipment. Can anyone explain what we mean by ownership cost?
Isn't it the total cost of owning the equipment, including depreciation?
Exactly, Student_1! Ownership costs include depreciation, investment costs, taxes, and insurance. Let's break it down to see how we calculate depreciation using the straight-line method.
How does the straight-line method work?
Great question! It’s calculated by taking the initial price, subtracting the salvage value and tire costs, then dividing by the total life in hours. To remember this, think of the acronym 'ISTH'—Initial, Salvage, Tire, Hours. Now, what’s the next step?
We need to account for taxes and insurance costs next, right?
Exactly! These costs are typically calculated as a percentage of the average value of the equipment.
So, if we know these percentages, how do we compute them?
You’ll multiply those percentages by the average value of your machine. Always remember, clear record-keeping can help us ensure accuracy. Let’s summarize: to estimate ownership costs, we calculate depreciation first, then taxes and insurance based on the average value.
Operating Cost Calculation
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Moving on to operating costs, which components should we focus on?
We should look at fuel costs first, right?
Excellent, Student_1! Fuel costs are critical. They can vary significantly based on machine use and can be derived from fuel consumption factors in handbooks. Is anyone familiar with how we calculate fuel costs?
We multiply the fuel consumption factor by the horsepower of the machine and the unit fuel cost.
Precisely! This brings us to the topic of FOG costs. What does FOG stand for?
Filter, Oil, and Grease!
Right again! FOG costs can be calculated based on hourly consumption data from handbooks or as a percentage of fuel costs. Remember that adjustments may also be needed based on labor skills—let’s think about each factor carefully.
How do we know which handbook to trust for accurate values?
It’s vital to choose handbooks from manufacturers known for reliability. They often provide tables with conditions for various models. Let’s recap: we calculate fuel costs based on consumption factors and fuel prices, and FOG costs based on handbook data or as a percentage of fuel costs.
Comparison of Caterpillar and Peurifoy Methods
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Now, how does the Peurifoy method differ from the Caterpillar method in estimating costs?
I think Peurifoy considers the time value of money, right?
Correct! The Peurifoy method requires timing cash flows to achieve greater accuracy. Can anyone explain how we convert initial costs in this method?
By using a uniform series capital recovery factor, to convert to annual costs!
Absolutely! You will also convert salvage values using the sinking fund factor. Why might this distinction matter for project budgets?
It’s important because it gives a better representation of costs over time, addressing how cash is really flowing.
Well stated, Student_2! Remember: the Caterpillar method is often simpler while Peurifoy’s is more accurate for long-term financial planning. Let’s wrap up with a summary of accuracy and methods.
So both methods have unique benefits and drawbacks!
Introduction & Overview
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Quick Overview
Standard
In this section, we delve into the FOG cost calculation as part of overall equipment costs. It outlines the significance of accurately estimating ownership and operating costs using two prominent methods: Caterpillar and Peurifoy. Special emphasis is placed on calculating consumables and variations in labor rates, contributing to clearer financial forecasting in construction projects.
Detailed
Detailed Summary
This section covers the calculation of FOG costs, which include Filter, Oil, and Grease, pivotal components in estimating total equipment costs in construction. The approach utilizes the Caterpillar and Peurifoy methods for determining ownership and operating costs.
The Caterpillar method involves:
1. Ownership Cost Estimation:
- Depreciation Calculation: Using the straight-line method, which determines depreciation by subtracting the salvage value and tire costs from the initial price, divided by the machine's useful life in hours.
- Other Ownership Costs: Taxes, insurance, and costs of investment, all calculated as a percentage of the average value of the equipment.
- Operating Cost Estimation:
- Fuel Cost: Determined from fuel consumption factors listed in equipment handbooks, multiplied by the horsepower of the machine and the unit fuel cost.
- FOG Cost: These consumables are computed based on documented hourly usage from handbooks or as a percentage of fuel costs, adjusted for labor variations reflecting operator skills.
The Peurifoy method similarly estimates ownership costs by considering time value and cash flows, adjusting initial costs and salvage values to suggest more accurate ongoing costs.
Both methods highlight the importance of accurate records and adjustments according to equipment and site conditions, ultimately aiding production efficiency and cost-effectiveness in equipment management.
Audio Book
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Introduction to FOG Costs
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FOG is nothing but filter, oil, grease. These are also the consumables which are consumed during the equipment operation.
Detailed Explanation
FOG costs refer to the expenses associated with consumables needed for the operation of machinery. This includes filters, lubricating oil, and grease. These items are essential for maintaining equipment efficiency and prolonging its operational life.
Examples & Analogies
Think of FOG like the essential components needed for a car to run smoothly. Just as you need oil and filters to keep an engine healthy, construction equipment requires similar consumables to function effectively.
Determining FOG Costs
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If you are looking into the Caterpillar performance handbook, you can see as I told you the hourly consumption or the filters, hourly consumption of lubricating oil, hourly consumption of grease is available for different equipment models for different operating conditions. You can directly take it multiply by the unit cost. You will get the FOG cost.
Detailed Explanation
To calculate the FOG costs, one would refer to the equipment's performance handbook, which provides specific values for the hourly consumption of filters, lubricating oil, and grease for various models under different operating conditions. By multiplying the consumption rates by the respective unit costs, one can determine the total cost of FOG for a given period of operation.
Examples & Analogies
Imagine you have a coffee machine that needs specific types of filters and water to brew. The handbook provides precise details on how much filter and water you'll need per cup. By knowing this and the cost per cup, you can easily calculate how much you'll spend on coffee filters for a month based on your usage.
FOG Factor Adjustment
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In some other handbooks, you can see that they give it as a FOG factor, factor in the sense you have to multiply this factor by the fuel cost. It will be expressed as a percentage of the fuel cost.
Detailed Explanation
Certain handbooks present FOG costs as a percentage of fuel costs, referred to as the FOG factor. This percentage helps in adjusting the overall cost estimation by considering how much FOG costs vary with fuel consumption.
Examples & Analogies
Think of a restaurant calculating its ingredients costs based on how much food they buy. If certain ingredients are essential based on the amount of food served (like how FOG relates to fuel used), this percentage helps restaurant owners estimate their expenses accurately based on changing consumption.
Labor Adjustment Factor
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In addition, you have to apply some labor adjustment factor also to get the accurate value because as you know that the labor skills depending upon the operator skill the labor skill all these operating cost will vary a lot.
Detailed Explanation
To appropriately account for the variability in operational costs, especially in relation to FOG costs, a labor adjustment factor may be applied. This factor varies based on the skill level of the operator and local labor costs, influencing the overall cost estimation for using machinery.
Examples & Analogies
Consider hiring gardeners to maintain your yard. An experienced gardener may complete the job more efficiently and with better results than a novice. This difference in skill affects the overall cost of maintaining your yard, much like how skilled operators can influence the operational costs of machinery through their efficiency.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
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FOG Costs: Essential consumables necessary for equipment operation referring to filters, oils, and grease.
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Depreciation: Calculated as the initial price minus salvage value divided by the useful life of the machine.
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Ownership Cost: Encompasses all costs associated with owning equipment, such as depreciation, taxes, and insurance.
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Operating Cost: Costs associated with running the machinery regularly, including fuel and other consumables.
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Caterpillar and Peurifoy Methods: Two primary methods for estimating equipment costs in construction, each with its own approaches.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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If a excavator has an initial cost of $200,000, a salvage value of $20,000, and operates for 10,000 hours, its hourly depreciation can be calculated as follows: (200,000 - 20,000) / 10,000 = $18/hour.
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A construction project may use a Caterpillar handbook to find that its excavator has an hourly fuel consumption of 10 gallons; if fuel costs $4 per gallon, the hourly fuel cost will be 10 * 4 = $40.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
🎵 Rhymes Time
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To keep machines in great shape, oil, grease, and filters cannot wait.
📖 Fascinating Stories
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Imagine a contractor who forgot to change the oil in his excavator. As a result, the machine broke down, leading to costly repairs. He learned the hard way that FOG is essential!
🧠 Other Memory Gems
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Remember FOG for 'Filter, Oil, Grease' and think of it as what you need to keep your machinery moving smoothly.
🎯 Super Acronyms
FOG
- F: for Filter
- O: for Oil
- G: for Grease - three necessities for maintenance!
Flash Cards
Review key concepts with flashcards.
Glossary of Terms
Review the Definitions for terms.
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Term: FOG Costs
Definition:
Costs associated with Filter, Oil, and Grease required for equipment operation.
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Term: Depreciation
Definition:
The reduction in value of equipment over time due to wear and tear.
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Term: Caterpillar Method
Definition:
A cost estimation method focusing on ownership and operating costs based on documented equipment performance.
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Term: Peurifoy Method
Definition:
A more advanced cost estimation technique that incorporates the time value of money for accurate financial forecasting.
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Term: Operating Costs
Definition:
Expenses that are incurred during the operation of equipment, including fuel, maintenance, and consumables.