Most organizations separate and manage equipment costs by running an “equipment account.” This is usually one large account debited with all the actual costs of owning and operating the fleet and credited with all the “revenue” generated by billing the jobs. The balance is deemed good when “the shop makes money” and bad when “the shop loses money.”
It is not that simple. We must look further if we are to manage the equipment account with any degree of confidence.
We discussed whether or not the equipment account should make a profit in January, and we emphasized the need to focus on cost recovery rather than revenue in October 2006. The equipment account does not “make money” or “lose money.” Any gain or loss is the difference between the actual cost of running the fleet and the internal cost-recovery charges levied against the jobs for the use of the equipment. It is an internal measure of performance and only indicates how actual costs compare to estimates we made when we set the internal cost-recovery rates.
Balancing the account as a single overall number is not difficult. We spend money on machines and we charge machines to jobs in an ongoing effort to recover the total cost of the fleet. Experience and a modicum of good management will ensure that the account will balance. If there is a small gain, we carry it forward, contribute it to company results, or redistribute it as a credit to the jobs. Losses are different. Organizations agonize over negative impact on company results or job profits.
We cannot easily act based on a single value for a loss or gain on the account. Too many variables exist; you have to have more detail to analyze. Our sample table helps understand what needs to be done.
We've set up our sample equipment account with a horizontal row for each individual unit and with a subtotal for each class, each group, and each operating fleet. Classes are made up of units with the same capability, capacity, and cost-recovery rate, such as mini-excavators. Groups summarize classes by type of machine, such as hydraulic excavators. Operating fleets summarize groups by region or major responsibility center in the company.
Vertical columns separate costs into owning costs, operating costs, and fuel, three major and different cost types. Each column provides an overall gain or loss for that cost, and overall gain/loss is in the cell at the lower right of the table.
Our analysis of the situation starts with two critical steps. First, we must ensure that the time that each unit works on a particular job is correctly recorded. Second, we must set a cost-recovery rate such that each class, group and operating fleet is balanced within itself.