would have got about 12% at the time. Now I was talking a language the financial controllers could understand, and not going on about cylinder regrinds, oil changes and vibration.
Going further
The figures looked at so far are the operating costs. To calculate the overall cost of owning and operating the machine we need to include further costs, i.e. the fixed costs. These are:
1.Depreciation 2.Storage 3.Insurance 4.Cost of finance
1. Depreciation
Depreciation of an asset, e.g. machinery, is the loss in value each year of ownership. Although no actual cash is involved, depreciation is counted as a legitimate business expense and appears on the Profit & Loss account as a cost. Depreciation can be calculated in two ways:
a) A fixed amount every year over a given time period, e.g. a mower costing £25,000 and depreciated at 20% of purchase price for five years, known as the straight line method. After five years the machine is worth
zero if it is to be traded in as part exchange for a new machine. In reality, the machine is worth something even it is only of scrap value. This is why machinery is depreciated using the declining balance method.
End yr 4 - £10,546.88 - 25% (£2,636.72) = £7,910.16
End yr 5 - £7,910.16 - 25% (£1,977.54) = £5,932.62
Using this method the machine value does not reach zero and is used to calculate trade-in value against a replacement machine.
Machinery and equipment is normally calculated at 20% or 25% per year. The figures are treated as a business expense and appear on the Profit & Loss Statement. Buildings are often depreciated using the straight line method over twenty five or thirty years.
2. Storage
b) The declining balance method is calculated by reducing the value of the machine by a percentage of the value each year the machine is owned, as illustrated:
Purchase price - £25,000
End yr 1 - £25,000 - 25% (£6,250) = £18,750
End yr 2 - £18,750 - 25% (£4,687.50) = £14,062.50
End yr 3 -£14,062.50 - 25% (£3,515.63) = £10,546.88
Not a cost normally factored in when calculating machinery costs. However, machines and equipment are stored in a building, or on land, that cost money to provide and is subject to business rates. These costs can be calculated by measuring the area taken up by the machine and dividing into the costs of the building. To avoid complications storage is normally calculated at 4% of cost price multiplied by the number of years the machine is owned.
3. Insurance
Insurance required for machinery and equipment will be to cover fire and theft whilst in storage, Employer’s Liability to cover injuries to the operator and Public Liability to cover injury to other people or property. Organisations will have different requirements and the manager
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