Calculating Machinery

Operating Costs

Ian Yule,

138.255

A summary of sections 9 - 13.

•When planning we need:

– An accurate method of calculating the cost of owning machinery.

•The comparative cost of different machine combinations.

•The comparative cost of getting the work done through means

that do not include ownership

–To know the effective work we are getting from machinery.

•The ability to calculate costs per hour and per hectare.

– The capacity we need to carry.

•What are the timeliness costs from not being able to get the job

done and what are the risks of overcapacity.

Machinery costs

Cost Components

•Interest on Capital

•Depreciation

•Tax Insurance and Housing

•Repair and Maintenance

•Fuel

•Labour

Fixed

Costs

Variable

Costs

Fixed: because they are fixed regardless of the level of use.

Variable: Because they vary with the level of use. Include labour

because we may be comparing machines of different capacity.

The Importance of Planning

•When buying machinery, planning is important in order to be able to tailor

payments to the business cash flows.

• Seasonal payments for different client groups, dairy, sheep and

beef, cropping and contractors.

• Most finance companies will use individual contracts but bulk

purchase can be advantageous.

• Special deals with low interest may be less flexible in terms of

payment schedules.

• Many appear to prefer to buy as opposed to lease, especially if they

have their own maintenance facilities.

Interest on Capital

Always use an interest rate because even if we do not borrow money to

finance purchase then we could have investment interest on the money.

This is termed an “opportunity cost”.

Remember this is an interest only calculation.

In reality a farmer or contractor is likely to pool this funding, but we still

need to allocate costs to individual machines.

DepreciationReasons:

• Reduction in machine performance due to worn parts.

• Increase in cost for the same unit of output, due to increase

in power consumption, labour or repair cost.

• Obsolescence

• Change in farm enterprise so current machinery capacity

becomes inappropriate.

Methods of Calculation.

Straight Line: fixed amount depreciated every year. Simple if

considering having the asset for a longer period.

Fixed Percentage (diminishing balance): More accurately reflects

the value of the asset throughout its life. Useful when

looking at ownership alternatives.

Geometrically Adjusted Diminishing Balance: The most accurate,

reflects the initial drop in value of the asset.

DepreciationStraight line probably

overestimates value until

the end of the machine’s

life.

GADB has a significant

drop in value as soon as

the machine is purchased.

DB does not reflect initial

drop in value but does

value machine less than

straight line.

Tractor Value $ (P.P. $120,000)

0

20000

40000

60000

80000

100000

120000

2007 2008 2009 2010 2011 2012 2013

Year

Valu

e $ GADB

Straight Line

DB

One of the problems you may encounter is that real depreciation is not

adequately reflected by IRD rates. Actual value is likely to be less than

IRD allow you, especially for specialised items.

Tractor Value $ (P.P. $120,000)

0

20000

40000

60000

80000

100000

120000

2007 2008 2009 2010 2011 2012 2013

Year

Va

lue

$

GADB

Straight Line

DB

IRD

$20,000 difference

Tax and Insurance

Licence costs and Insurance.

• Find out actual costs or use a percentage (typically 1.5 % of new

purchase price).

• Insurance is usually required when purchased on Hire Purchase.

Housing and Shelter

Many suggest that a housing cost should be included, can be done

where appropriate. In terms of depreciation, repair and maintenance it

certainly helps to keep machinery inside and out of the weather, for

some machinery this should be regarded as essential.

Variable Costs Repair and Maintenance

• Repair and Maintenance costs can be highly variable and unpredictable for

individual machines.

• As machines get older then clearly they are likely to need more repairs.

• Standard methods use the results from surveys to calculate estimated repair

and maintenance.

• The more complex the machine the more likely it is that costs will increase

as the machine gets older.

• The most common way to express it is as a cumulative cost through the life

of the machine.

• The equation used to calculate cost is:

2

10001

RFHoursdAccumulate

RFTAR

NB. RF1 and RF2 are standard factors for most categories of machine published by

ASABE.

TAR = Total Accumulated

Repair and Maintenance cost

Annual Repair and Maintenance Cost Expressed as a Percentage

of Purchase Price.Annual Repair and Maintenance costs asa % of P.P.

0%

2%

4%

6%

8%

10%

12%

14%

1 2 3 4 5 6 7 8 9 10

Year

Perc

enta

ge o

f Pur

chas

e Pr

ice

Tractor Roller Packer

Tractor Used for

1000 hours

Roller Packer 200

hours per annum

• Need to calculate fuel consumption as it depends on the level of use

and the way the machine is driven.

• Fuel consumption can be expressed as:

Specific Volumetric Fuel Consumption (SVFC) expressed in

units of l.kWh-1 (Litres per kilowatt hour). Typical range is 0.24

to 0.57 l.kWh-1.

• Can also be expressed as:

The Specific Volumetric Fuel Efficiency (SVFE), in units of

kWh.l-1 (Kilowatt hours per litre). Typical range is 2.36 to 4.1

kWh.l-1.

The standard equation to calculate SVFC use is:

Where X is the ratio of equivalent PTOpower to rated PTOpower

Fuel

173738203.091.364.2 XX

Bailey has used the same formula assuming the ratio (X) is 0.45

Tractor Fuel Use litres per hour

20

30

40

50

60

70

80

90

100

104 120 140 225 320 375

Rated PTO power

Fu

el u

se li

tre

s p

er

ho

ur

ASABE 0.45

Bailey

Engine Performance Zetor 7211

0

20

40

60

80

100

120

140

160

30 40 50 60 70 80 90 100 110 120

engine speed in % of rated engine speed

loa

d in

% o

f to

rqu

e a

t ra

ted

en

gin

e s

pe

ed

400

350300

280

260

240

230

225

220

214 213

212

20

40

60

80

100

en

gin

e p

ow

er

in %

of

po

we

r a

t ra

ted

en

gin

e s

pe

ed

216

211 g/kWh

250A

B

Engine Performance Map of Agricultural Tractor

Effect of Improving Operational Settings on Cost

Better setting of machine leads to a 35% reduction in operating cost,

through higher output and reduced fuel use

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

Costs [£/ha]

59.45 59.50 59.55 59.60 59.65

Latitude

54.50

54.55

54.60

54.65

54.70

54.75

54.80

Lo

ng

itu

de

Welton Field

59.30 59.35 59.40 59.45 59.50 59.55

Latitude

54.40

54.45

54.50

54.55

54.60

54.65

54.70

54.75

54.80

Lo

ng

itu

de

Quarry Field

Again standard figures are the result of surveys. So there are ways

to improve performance.

• Interest in recording fuel use,

Used to happen but we haven’t worried while we had

cheap energy but now people are more concerned.

• Fuel consumption figures from tractor manufacturers.

Selection of tractor with particular reference to

transmission system and tasks to be completed.

• Setting of machinery can a make a big difference.

Matching machinery to tractor.

• The “Gear Up and Throttle Down” message is perhaps an over-

simplification.

Points to consider

Labour

• When comparing systems we put in labour costs because a larger

capacity machine will have lower labour charges per unit of area.

• Need to work out machinery capacity. In order to calculate cost on the

basis of $ per hour or $ per hectare.

Machine operating speed and field efficiency

Contractors may also have to consider travelling time etc.

Typical Field efficiencies. %

Ploughing 75 - 85

Fertiliser Broadcasting 45 - 55

Spraying 55 - 65

Harvesting 65 - 75

• 100 kW Tractor (cost $120,000 and used for 1,000 hours per year)

• 5 furrow plough ($35,000 used for 300 hours a year. Interest rate 8%)

Putting it all together

Because of the way we have

calculated depreciation, we

have very high cost in the

first year.

After first year cost relatively

stable.

In 2010 the machinery cost us

$64 per hour to operate.

Machinery Yearly Operating Cost

0

20

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013

Year

$ p

er

Ho

ur

Machinery Yearly OperatingCost

Putting it all together Hourly cost of ploughing

Slightly different, this is the average

cost throughout the machines life.

In 2010 this machinery has cost us an

average of $82.50 per hour over the 4

years.

Average Operating Cost

0

20

40

60

80

100

120

140

160

2007 2008 2009 2010 2011 2012 2013

Year

$ p

er

Ho

ur

Average Operating Cost

• 100 kW Tractor (cost $120,000 and used for 1,000 hours per year)

• 5 furrow plough ($35,000 used for 300 hours a year. Interest rate 8%)

• Need to calculate work rate.

5 furrow plough, 16” furrows (0.4m), plough width 2m.

Field Efficiency 80%. Ploughing speed 7.5kmh-1

Farm situation

Output = speed x width x efficiency

= 7500 x 2 x 0.8

= 12,000m2 = 1.2 ha per hour.

• Contractor who has to travel. Field efficiency 60%

Output = 7500 x 2 x 0.6 = 0.9 ha per hour.

• Assume an hourly charge rate of $100 per hour.

Achieving 80% field efficiency, actual cost = $125 per hectare.

60% field efficiency, actual cost = $167 per hectare.

From cost per hour to cost per hectare.

Tractor Operating costs. (Including Labour)

Keeping a tractor for 3 years.1000 hours per year.

Average hourly operating cost = $65.85

Highest Dep. $19.88

Labour $18

Fuel $16.59

Keeping tractor for 7 years. Average hourly operating cost = $56.30

Highest Labour $18.00

Fuel $16.59

Dep. $11.49

Hourly Operating Costs

19.88

8.50

1.08

1.80

16.59

18 Depreciation

Interest

R&M

Insurance & Tax

Fuel

Labour

11.49

5.91

2.52

1.8016.59

18

Depreciation

Interest

R&M

Insurance & Tax

Fuel

Labour

Tractor Operating costs. (Including Labour) 600 hours

Keeping a tractor for 3 years. 600 hours per year.

Average hourly operating cost = $85.53

Highest Dep. $33.13

Labour $18

Fuel $16.59

Keeping tractor for 7 years. Average hourly operating cost = $68.09

Highest Dep. $19.14

Labour $18.00

Fuel $16.59

33.13

14.160.65

3.00

16.59

18.00

Depreciation

Interest

R&M

Insurance & Tax

Fuel

Labour

19.14

9.84

1.513.0016.59

18

Depreciation

Interest

R&M

Insurance & Tax

Fuel

Labour

Conclusions

• Planning is essential.

Number of machines and capacity.

Replacement period.

Planning finance. Flexibility and cash flow

These methods estimate cost rather than give a definitive answer. For

example depreciation on big ticket items can be difficult to predict.

• Fuel and Labour are important costs.

Training and driver education.

Properly matching machine to tractor.

Ballast and tyres.

• Clearly the shorter the ownership period and the fewer hours worked

fixed cost can very quickly get out of control.

Sources of Information

Most of the work you have seen is based on the ASABE Standards.

These contain standard figures to use for R&M, Depreciation etc.

Some information will be provided on NZCPA Website.

http://www.nzcpa.com

Bailey FAR CD

ASABE

American Society of Agricultural and Biological Engineers