4 - Total Cost Overview
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Introduction to Total Cost Calculation
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Today, we will learn how to estimate the total costs associated with owning and operating heavy machinery. This includes understanding both ownership and operating costs.
What exactly are ownership and operating costs?
Ownership costs typically include purchase price, depreciation, insurance, and taxes, while operating costs encompass fuel, labor, and maintenance.
How do we use these costs in our calculations?
We’ll add up all these costs to find the total equipment cost. This includes calculating hourly rates based on usage. For example, operating a vehicle like a dump truck has specific calculations, as we'll see.
Estimating Ownership Costs
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Let’s now focus on ownership costs. Can anyone tell me what depreciation means?
Isn't that the decrease in value over time?
Exactly! We calculate it using the initial cost minus the tire cost divided by the useful life of the equipment.
What if the salvage value is not zero?
Good question! If there's a salvage value, we adjust our calculations by subtracting that from the initial cost before the division.
Can you give us an example?
Sure! For a dump truck costing 3 crores with tire costs of 11 lakhs and a useful life of 12.5 years, we’d calculate depreciation like this: (3,00,00,000 - 11,00,000)/12.5.
Operating Costs and Their Estimation
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Now, let's explore operating costs. What are some examples?
Fuel and maintenance costs, right?
Correct! We can estimate fuel costs using the consumption rate based on horsepower. For instance, if a truck consumes 0.09 liters per horsepower, and has 250 horsepower, we can calculate the fuel cost.
What about repair costs?
Repair costs can be a percentage of the machine's value. For example, if the repair cost is 6% of the initial cost, we compute it accordingly.
So how do we combine these costs?
We’ll add the hourly fuel, labor, and maintenance costs to get the total operating cost!
Total Cost Summation
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Finally, let’s determine the total equipment cost. What should we do first?
Combine the total ownership and operating costs?
Exactly! Then we need to include operator wages to get the final cost per hour.
Can you remind us of the formulas?
Certainly! Total Cost = Total Ownership Cost + Total Operating Cost + Operator Wages.
In this example, what do we arrive at?
The total equipment cost for the dump truck comes to ₹6122.29 per hour.
Introduction & Overview
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Quick Overview
Standard
The section explains how to calculate the total ownership and operating costs of heavy equipment, specifically an off-highway dump truck. It details the necessary parameters for estimation, formulas for depreciation, and methods for calculating fuel and operating costs.
Detailed
In this section, the focus is on understanding the total cost involved in owning and operating heavy equipment, especially off-highway vehicles like dump trucks. It describes how to calculate the initial ownership cost, including depreciation, interest, insurance, and taxes following the guidelines provided by the Peurifoy method. The section further explores detailed examples, emphasizing the significance of various factors such as annual usage, repair costs, and operating wages in determining the economic cost of machinery. Key formulas for calculating hourly costs related to ownership and operation are provided, illustrating the complexities of construction equipment management.
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Ownership and Operating Costs Definition
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 first chunk, we learn that to determine the total cost of operating a piece of equipment (like a dump truck), we need to calculate various costs. This includes ownership costs (the costs of owning the equipment), operating costs (costs endured while operating the equipment), and wages paid to operators. By summing all these costs, we arrive at the total equipment cost, as outlined by the Peurifoy guidelines, which offers a structured approach for estimating construction and equipment costs.
Examples & Analogies
Think of running a small delivery business. You need to consider not only the purchase cost of your delivery vehicle but also its fuel, maintenance, insurance, and the salary of your driver. Just like in this equipment example, your total cost just wouldn't be the price of the vehicle alone.
Characteristics of Off-Highway Trucks
Chapter 2 of 8
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Chapter Content
This truck is not permitted on the public highways. It is heavy equipment high end equipment you can see that these trucks will be operated only in the project sites.
Detailed Explanation
Here, we define what off-highway trucks are. Unlike regular vehicles that can drive on public roads, off-highway trucks, like the dump truck mentioned, are designed specifically for construction sites and other project-specific environments. This distinction is important as it affects how we calculate costs associated with usage, maintenance, and durability.
Examples & Analogies
Imagine a construction site filled with bulldozers and dump trucks. These machines are like specialized tools in a toolbox — designed for specific tasks that normal cars or trucks cannot do. They have unique features and cannot be taken onto public roads, much like how specific cooking tools can only be used in certain recipes.
Estimating Economic Costs
Chapter 3 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. You can choose the appropriate estimation handbooks and choose the values estimated accurately.
Detailed Explanation
This chunk emphasizes the need for accurate data when estimating costs related to heavy machinery. Depending on the type of equipment, appropriate handbooks should be used to select the relevant values for fuel costs, maintenance, depreciation, etc. These estimations are crucial for preparing realistic budgets and project plans.
Examples & Analogies
It's similar to following a recipe when you're cooking. You need the right ingredients and quantities to ensure your dish turns out well. Just as missing a key ingredient could ruin a meal, using incorrect values for equipment costs can lead to budget overruns in a construction project.
Associated Costs of Owning a Truck
Chapter 4 of 8
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Chapter Content
The other associated cost are the interest rate which is nothing but 8% insurance 2% and taxes 3%.
Detailed Explanation
When calculating the total cost of ownership, we must include other expenses like interest on loans used to purchase the equipment, insurance costs, and taxes. In this example, the rates are specified: 8% for interest, 2% for insurance, and 3% for taxes. These percentages will be applied to the average value of the truck to estimate their total contribution to the overall cost.
Examples & Analogies
Think about buying a house. Along with the mortgage payment, you also have to pay property taxes, homeowners insurance, and possibly interest on your loan. Each of these adds to the total monthly cost of owning your home, just like these additional costs add to the total cost of owning a truck.
Annual and Lifetime Usage Metrics
Chapter 5 of 8
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Chapter Content
The truck is expected to have annual use of 1600 hours. ... its useful lifetime the hourly usages 20000 hours.
Detailed Explanation
This part discusses how we assess the usage of the truck. It is projected to be used for 1600 hours each year and is expected to have a total life of 20,000 hours. Understanding these metrics helps in spreading out the depreciation over its useful life and will influence the cost calculations significantly.
Examples & Analogies
If you plan to use your bike for commuting every day, you might estimate how many weeks each month you'll use it. If you know your bike will last for several years, you can figure out how much it costs per ride based on your estimated overall use.
Calculating Depreciation
Chapter 6 of 8
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Chapter Content
Now we shall calculate the depreciation, ... useful life of the machine.
Detailed Explanation
Depreciation is the reduction in value of the equipment over time due to wear and tear. Here, the method for calculating it involves taking the initial purchase price, subtracting the tire cost, and dividing by the useful life of the truck. This helps in determining how much value the truck loses annually, which is essential for budget planning.
Examples & Analogies
Think of a new car that you buy. Each year, it loses value because it gets older and is used more. By tracking this annual depreciation, you can better understand its value if you decide to sell it after a few years.
Maintenance and Additional Costs
Chapter 7 of 8
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Chapter Content
The annual repair cost is 6% of the initial cost excluding the tire cost.
Detailed Explanation
In addition to depreciation, regular maintenance costs like repairs also need to be accounted for in the total cost of ownership. Here, it is stated that repairs cost 6% of the initial price (minus tire costs) annually. This estimation ensures you set aside enough funds for maintenance to keep the equipment in good working order.
Examples & Analogies
Imagine owning a smartphone. You might pay for a protective case, repair fees if it breaks, or regular software updates. These ongoing expenses are similar to the maintenance costs associated with heavy machinery.
Total Cost Calculation
Chapter 8 of 8
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Chapter Content
Now calculate all the total ownership cost components ... total hourly ownership cost as rupees 2713 per hour.
Detailed Explanation
Finally, after all individual components are calculated (like depreciation, interest, insurance, and repairs), we add them together to find the total hourly ownership cost. This final figure is crucial as it will be used in further calculations to determine overall project costs when the truck is in service.
Examples & Analogies
When planning a family vacation, you might add up all costs, including flights, hotel stays, food, and activities. By understanding the complete expense, you can budget accordingly and avoid overspending, just like calculating total ownership costs for equipment.
Key Concepts
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Total Cost Calculation: The sum of ownership and operating costs to manage heavy equipment.
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Caterpillar Method: A method for estimating equipment costs, focusing on ownership costs.
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Peurifoy Method: A detailed approach to computing equipment costs, considering time value of money.
Examples & Applications
For a dump truck with a purchase price of ₹3 crores, operating costs can be calculated based on usage hours and associated fuel, maintenance, and labor costs.
The Caterpillar method helps estimate the average annual investment in machinery by accounting for depreciation and expected hours of operation.
Memory Aids
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Rhymes
Ownership and Operation, two sides of the tool, calculate them right, and you'll rule the school.
Stories
Imagine a team of builders estimating costs for their dump truck. They begin with ownership costs like depreciation, then move to operating costs like fuel, learning to capture every detail for accurate budgeting.
Memory Tools
Remember 'D-I-T' for 'Depreciation, Insurance, Taxes' — key components of ownership costs.
Acronyms
C.O.T. - Costs Of Total = Ownership + Operation + Labor.
Flash Cards
Glossary
- Ownership Cost
The total cost associated with owning an asset, including depreciation, insurance, operating costs, and taxes.
- Operating Cost
Costs incurred during the operation of machinery, including fuel, labor, maintenance, and repair.
- Depreciation
The reduction in value of an asset over time, usually calculated on a straight-line basis.
- Salvage Value
The estimated resale value of an asset at the end of its useful life.
- Peurifoy Method
A systematic approach to estimating equipment costs, accounting for ownership and operating expenses.
Reference links
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