Calculating Operating Rates

Question 1

What are the two types of owning and operating costs?

Answer 1

Owning- often called fixed costs as they are the same from day to day whether running the equipment or not

– Depreciation, Interest, Taxes, insurance, licences, overhead (prorate of: office and supervision costs), lease payments……….

• Operating –often called variable costs as they will change with the time the equipment is running

– Fuel, lubes, repairs, tires, lines and rigging, maintenance, operator wages

Question 2

What is capital expenditure?

Answer 2

Funds used by a company to buy physical assets such as property, industrial buildings or equipment.

Question 3

How are assets written off?

Answer 3

Some sort of contract

assets don’t last forever, so accrual accounting spreads an asset’s cost proportionally over a time period which the asset was used

• Depreciation, Amortization and Depletion are used to prorate the cost over an asset’s life

Question 4

What is amortization?

Answer 4

Amortization refers to spreading an intangible asset’s cost over that asset’s useful life

– example, a patent on a piece of equipment has a life of 17 years.

– The cost of creating the equipment is spread out over the life of the patent and recorded as an expense on the company’s income statement

– Purchase of a woodlot on crown land??

Question 5

What is depletion?

Answer 5

Depletion refers to the allocation of the cost of a natural resource over time

• Example:

– an oil well has a finite life so it’s setup costs are spread out over the predicted life

– An area with harvestable timber will have development costs (mainline roads and bridges mostly) that will depleted over the volume of timber and charges as an expense

Question 6

What is depreciation?

Answer 6

Depreciation - prorating a tangible assets cost over its life

– New excavator can be used for a number of years before it becomes run down and is sold

– cost of the excavator is spread out over it’s life and a portion of the cost is expensed each year

Question 7

What is the dry rate?

Answer 7

Dry Rate = Ownership + Overhead +Profit and Risk

Called Dry Rate because it’s the obligation of the leasee to supply fuel, lubricants, operator wages, maintenance, repairs…

Question 8

How do we get productive hours?

Answer 8

– Mechanical Availability (breakdowns - .95)

– Operating Efficiency - delays (log truck waits for loader), machine travel (lowbed), safety and production meetings (.95)

– Utilization Rate = OE X MA = .95 X .95 = .90

• PH = 1600 (.90) = 1440 hours of working time