Welcome to today’s video, where we will learn how to allocate equipment to job costs.
Let’s go back to our example where we are controllers for a construction company. Now, it’s been a few months since we bought the new excavator, and we have found that keeping equipment is expensive. Not only do we have to pay off the loan and pay interest on it, we also have to pay for expenses like insurance, licensing, gas and oil, and repairs. One of the big costs we’ve had to pay is depreciation of the excavator. Equipment is very expensive!
So how will we account for all of the costs that go into our equipment? The answer is very similar to how we account for job costs. When doing job costing, we have a set of cost codes that we use to allocate costs to projects. For equipment, we do the exact same thing. Only, the equipment is the profit center in lieu of a job. Of course, they're completely different sorts of cost codes. But the truth is they're still cost codes.
So, when we get an invoice from our repair shop, instead of posting it to a project, we are going to post it to a piece of equipment and an equipment cost code. This will give us the ability to run equipment reports that are similar to job cost reports. But, now, instead of looking at what costs are associated with a particular job, we’ll be looking at what kinds of costs are associated with a particular piece of equipment.
As an example, let's look at this caterpillar excavator. Here are the depreciation insurance and licensing costs. Now in this case, it also looks like an employee was paid to do some sort of repair or maintenance on this piece of equipment. So, in total, we’ve spent about $9,300 on this piece of equipment so far.
Another important report that we will want to look at is something called a utilization report. Utilization reports show how much a piece of equipment is being used. In this case, it looks like our company has used this excavator for about 520 hours so far this year. Let's look at why this kind of information is important!
We will be grossly underestimating the job costs on every project if these costs are not being allocated to job costs. And if we’re doing a TNM or a cost plus billing, we’ll need to turn those equipment costs into job costs, so we can bill customers for their use. To do that, we need to know how much the equipment costs us on a per hour basis.
We find that rate by taking total costs applied to the equipment and simply dividing them by the total utilization on the piece of equipment. The final number we get is the costs per hour!. It is important to know that equipment is almost always talked about in terms of a cost per hour. Heavy equipment has a meter in it to track every hour that's being used.
Now, you could use a similar calculation on a mileage basis if you were working with a customer who wanted to allocate equipment like a truck or car. The most important thing to realize here is that with simple math, we can determine how much a piece of equipment costs us. For example, our excavator costs us $17.82 for every hour that it is allocated. Now, we have to take that cost per hour, $17.82, and allocate it to a job cost. This happens through capturing equipment usage from the field. To do this, employees at job sites collect and fill out manual time sheets, or use an ERP software for payroll time entry.
The employee can enter the job that they were working on, what piece of equipment they were using, and how many hours they used the equipment. This information comes from the field and gets processed through payroll. Now, let’s see what happens when we run our job cost reports.
This is a part of the job cost history report for the Canyon Park project broken down by different cost codes. If you look at the saw cut asphalt cost code, you're going to notice that we have equipment cost captured here. We can very clearly see that this excavator was allocated at a rate of $50 per hour. We can see the days that it was used for eight hours, which means of course that's $400 per day that we are posting to job costs. That's $4,000 worth of costs that we have taken out of our equipment cost bucket and moved above the line. It's now a job cost.
Now, we are getting a clearer picture of how much construction jobs really cost. This means our estimators are doing a better job of estimating, project managers are feeling more in control, and we can confidently plan to grow our equipment fleet and our business.
Equipment expenses, along with other accounting workflows, can be difficult to manage in a way that maximizes your organization's efficiencies.
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