3 - Operating Cost Estimation
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Understanding Ownership Costs
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Today, we'll start by discussing the various components that make up the ownership costs of machinery. Ownership costs typically include initial purchase costs, depreciation, interest, insurance, and taxes. Who can tell me what depreciation means in this context?
Isn't depreciation how much value the machinery loses over time?
Exactly! It's calculated as the initial value minus salvage value over the useful life. Can anyone identify what the useful life of our example dump truck is?
It’s 12.5 years, based on its total expected life of 20,000 hours and annual usage of 1,600 hours!
Great answer! So, remember the formula for calculating depreciation: (Initial Price - Tire Cost)/(Useful Life). Let’s move on and see how these pieces connect to our total ownership cost.
Calculating Operating Costs
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Now that we understand ownership costs, let’s analyze operating costs. Operating costs include fuel consumption, lubricants, tires, and maintenance. Who can explain how to calculate the hourly fuel cost?
We can use the fuel consumption factor multiplied by the horsepower and the fuel cost per liter, right?
Exactly! That’s a perfect formula! For our truck, it’s 0.09 liters per hour per horsepower, times 250 horsepower, times the local fuel cost. Can anyone calculate that for me?
The answer is ₹1462.50 per hour!
Correct! It’s crucial to add all these components together to determine the total operating cost. Let’s ensure we summarize the total costs next.
Total Cost Estimation Using the Peurifoy Method
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We have covered both ownership and operating costs. Now let’s look at the Peurifoy method, which factors in salvage value and more nuanced repair costs. What is salvage value?
Salvage value is the estimated residual value of the equipment at the end of its useful life.
Correct! In the Peurifoy method, we assume 20% of the initial cost as salvage value. How does this impact our estimates?
It reduces the overall depreciation, thus potentially lowering ownership costs.
Exactly right! And we also factor repairs as a percentage of depreciation. This comprehensive approach yields a more accurate total cost. Before we wrap up, what’s one key takeaway we should remember about cost estimation?
Precision in calculations is essential to effective estimation!
Introduction & Overview
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Quick Overview
Standard
The section elaborates on how to calculate the total ownership and operating costs associated with machinery, using the Peurifoy guidelines. It explores cost components such as depreciation, interest, insurance, taxes, fuel consumption, and labor wages, illustrating these concepts through an example of a dump truck.
Detailed
Detailed Summary
In this section, the process of estimating operating costs for machinery is thoroughly detailed, particularly following the Peurifoy guidelines that highlight the importance of both ownership and operational costs. The example of a dump truck is used to illustrate the methodologies employed in these estimations.
Key Concepts Covered:
- Ownership Cost Calculation - This includes initial costs, depreciation, interest, insurance, and taxes. The process uses specific formulas to calculate annual depreciation and hourly costs for each component, ensuring a comprehensive understanding of how these factors contribute to total costs.
- Operating Cost Calculation - The operating expenses are derived from fuel consumption, maintenance (filter, oil, grease), tire costs, and repair costs. Each component is calculated based on estimated hours of use, the local fuel price, and specific consumption factors provided.
- Analysis of Estimates - The section wraps up by presenting the total hourly equipment costs and summarizing the components that comprise it. The Peurifoy method contrastingly addresses salvage value and repair factors, emphasizing their importance in accurate cost estimation.
Overall, this section emphasizes the structured approach necessary for effective cost estimation, demonstrating practical applications through quantitative examples.
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Overview of Operating Costs
Chapter 1 of 8
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Chapter Content
So just add up everything the ownership cost all the operating cost and operating wages also you will get the total ownership and the operating cost following the Peurifoy guidelines.
Detailed Explanation
In this section, we begin by emphasizing the importance of calculating total costs associated with equipment. This includes not just the purchase price but also ownership costs, operating costs, and wages needed to operate the equipment. Understanding the total operating cost is crucial for budgeting and financial planning in construction projects.
Examples & Analogies
Imagine running a restaurant. You wouldn't just factor in the rent for the location; you'd also need to consider bills for utilities, salaries for your staff, and costs for ingredients to figure out how much it actually costs to run your restaurant each month.
Estimating Costs Using an Example
Chapter 2 of 8
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Chapter Content
Now let us workout from examples on how to estimate the equipment cost using these 2 methods. (Refer Slide Time: 20:19) So you can see this problem in this problem you can estimate the cost for the dump truck.
Detailed Explanation
Here, we will apply the methodologies to a specific example—a dump truck. By using practical illustrations, we can break down how costs are estimated for different equipment, which will help us grasp the concepts more effectively.
Examples & Analogies
Think of it like budgeting for a new car. You look at the sticker price but also consider insurance, fuel, and maintenance when understanding the total cost of having that car.
Understanding Off-Highway Trucks
Chapter 3 of 8
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Chapter Content
It is an; heavy equipment high end equipment you can see that these trucks will be operated only in the project sites.
Detailed Explanation
Off-highway trucks, such as dump trucks, are specialized equipment designed for use in construction or mining sites. They are not legal for operation on public roads due to their size and weight. This specificity impacts their operating costs as they are specifically tailored and priced for heavy-duty tasks.
Examples & Analogies
Just like a race car is built specifically for racing and not legal on regular streets, an off-highway truck is tailored for heavy-duty tasks on construction sites.
Components of Ownership Costs
Chapter 4 of 8
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Chapter Content
The requirements are according to the type of the machine for which you are going to estimate.
Detailed Explanation
Ownership costs consist of several components such as initial purchase price, depreciation, interest, insurance, and taxes. Depending on the type of machine, these costs can vary significantly. Each factor contributes to understanding the financial commitments of owning heavy machinery.
Examples & Analogies
When you buy a house, you not only think about the mortgage payment but also property taxes, home insurance, and maintenance costs—similarly, ownership costs encompass all these financial elements for equipment.
Calculating Depreciation
Chapter 5 of 8
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Chapter Content
So under the ownership cost let us calculate the depreciation first.
Detailed Explanation
Depreciation is a way to account for the reduction in value of the equipment over its useful life. It can be calculated using the straight-line method, where the initial cost less any salvage value is spread evenly over the asset's lifetime. This helps companies plan for the eventual loss of value and prepare for future investments.
Examples & Analogies
Think of it like how a new car loses value each year. The calculations help you understand how much it 'costs' you per year to own that car based on its decreasing value.
Determining Total Ownership Costs
Chapter 6 of 8
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Chapter Content
Now let us move on to the operating cost estimation. So I have given you the question the average fuel consumption factor is 0.09 liters per hour per horsepower.
Detailed Explanation
Operating costs involve calculating fuel consumption, labor, maintenance, and other variable costs associated with the use of the equipment. For example, knowing the fuel consumption factor (liters per hour based on horsepower) allows businesses to project fuel costs accurately depending on expected usage.
Examples & Analogies
Just like planning a road trip requires estimates of fuel costs based on mileage and gas prices, estimating operating costs requires a detailed calculation based on how much the equipment will be used.
Calculating Hourly Operating Costs
Chapter 7 of 8
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Chapter Content
So now add all your operating cost components. So what are all the different operating cost components we have estimated so far.
Detailed Explanation
Once all components—fuel costs, maintenance, tire costs, etc.—are calculated, they are summed up to derive the total hourly operating cost. This gives a more comprehensive view of how much it costs to use the equipment in an hour, which is crucial for budgeting and Operations.
Examples & Analogies
It's similar to calculating the total cost of hosting a party by adding up the costs of food, drinks, decorations, and venue rental. You need the full picture to understand what you'll spend.
Finalizing Total Equipment Cost
Chapter 8 of 8
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Chapter Content
Total hourly ownership cost = ₹ 2713.00/hr; Operator wages = ₹ 200.00/hr; Total cost = ₹ 6122.29/hr.
Detailed Explanation
Finally, adding together the total ownership costs, total operating costs, and operator wages provides the full picture of what it costs to operate the equipment per hour. This total cost is crucial for project managers and financial planners to make informed decisions about budget allocations and resource management.
Examples & Analogies
Like planning the budget for a home renovation project, you gather all costs together—material purchases, contractor fees, and permits—to understand the total financial commitment.
Key Concepts
-
Ownership Cost Calculation - This includes initial costs, depreciation, interest, insurance, and taxes. The process uses specific formulas to calculate annual depreciation and hourly costs for each component, ensuring a comprehensive understanding of how these factors contribute to total costs.
-
Operating Cost Calculation - The operating expenses are derived from fuel consumption, maintenance (filter, oil, grease), tire costs, and repair costs. Each component is calculated based on estimated hours of use, the local fuel price, and specific consumption factors provided.
-
Analysis of Estimates - The section wraps up by presenting the total hourly equipment costs and summarizing the components that comprise it. The Peurifoy method contrastingly addresses salvage value and repair factors, emphasizing their importance in accurate cost estimation.
-
Overall, this section emphasizes the structured approach necessary for effective cost estimation, demonstrating practical applications through quantitative examples.
Examples & Applications
Calculating the total ownership cost of a dump truck involves summing up depreciation, interest, insurance, and taxes to derive the total hourly cost.
Using the Peurifoy method, estimates incorporate salvage value, adjusting the overall depreciation downward.
Memory Aids
Interactive tools to help you remember key concepts
Rhymes
To find depreciation, do the math, give the tires their rightful path.
Stories
Imagine a truck that rolls with pride, losing value as it rides. Each year it works, its worth declines, but salvage value by the end defines.
Memory Tools
Remember O-D-I-T: Ownership, Depreciation, Insurance, Taxes for remembering ownership costs.
Acronyms
COST
for Costs
for Ownership
for Salvage
for Total - a breeze to estimate!
Flash Cards
Glossary
- Ownership Cost
Costs associated with owning equipment, including depreciation, insurance, interest, and taxes.
- Depreciation
A reduction in the value of an asset over time, calculated as (Initial Value - Salvage Value) / Useful Life.
- Operating Cost
Expenses incurred in running equipment, such as fuel, maintenance, labor, and repairs.
- Salvage Value
The estimated residual value of an asset at the end of its useful life.
- Peurifoy Method
A comprehensive cost estimation method incorporating various operational factors including salvage value and specific repair costs.
Reference links
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