Farm Machinery and Equipment-II 3(2+1)

LESSON 31. COST OF OPERATION OF MACHINERY FOR OPTIMUM USE

FIXED COSTS

Depreciation: Depreciation costs mean a loss in the value of a machine due to time and use. Often, it is the largest of all costs. Machine depreciate, or have a loss of value, for several reasons such as age, wear and tear of machine and obsolescence. There are several methods to calculate the depreciation. These methods are estimated value, straight-line, declining-balance, sum-of-the year’s digits, and sinking-fund methods.

Estimated Value Method: It is the most realistic determination of depreciation. At the end of each year the value is compared with the value of machine possessed at the start of the year. The difference is the amount of depreciation (Table 1).

Table 1: Estimated values of depreciation at the end of year.

Machine	% of purchase price
	1	2	3	4	5	6	7	8	9	10
Tractor	36	6	5	5	5	4	4	3	3	3
Self-propelled combine	41	7	6	6	5	5	4	4	3	3
Tractor-drawn combine	46	7	6	5	5	4	4	3	3	2

 

Straight-line Method: In the straight-line depreciation method, an equal reduction of value is used for each year the machine is owned. This method is used to estimate costs on a specific period of time, provided the proper salvage value is used for the age of the machine. The annual depreciation value can be calculated by:

                                              P - S

                                    D =  ---------

                                                L

Where,

D         =          average annual depreciation, Rs/annum

P          =          purchase price, Rs.

S          =          salvage value, taken as 10% the purchase price

L          =          life of machine, years

 The straight-line depreciation method is not accurate. The cost of machine depreciates much faster in the first few years than in the later years.

Sum-of-the Years Digits Method: It is a much more accurate method of estimating the true value of a machine at any age because the annual depreciation rate decreases as the machine gets older. The amount of depreciation can be determined by

                                                   L - n

                                    D_n+1  =  ----------  (P -S), Rs./year

                                                     Y_d  

Where,

Y_d          =          Sum of the years digits           =          L (L + 1)/2

N         =          age of the machine in years at the beginning of year in question

L          =          life of machine, year

P          =          purchase price, Rs.

S          =          salvage value, Rs.

Declining-Balance Method: It reflects the actual value of a machine at any age. A machine depreciates different amount for each year, but the annual percentage of depreciation is the same. Depreciation can be calculated by:

                                    D_n+1       =          V_n - V_n+1

                                    V_n          =          P (1- X/L)ⁿ

                                    V_n+1       =          P (1 - X/L)ⁿ⁺¹

                                    D_n+1       =          P (1 - X/L)ⁿ (X/L)

Where,

D_n+1       =          amount of depreciation charged for year n+1, Rs./year

V         =          remaining value at any time

P          =          purchase price, Rs.

N         =          age of machine in years at beginning of year in question

L          =          life of machine, years

X         =          ratio of depreciation rate.  It may be any number between 1 and 2.

                        If X = 2 the method is called double-declining-balance method.

                        For used machine X is taken as 1.5.

Sinking-Fund Method: It is primarily advantageous for use with a planned replacement internal policy. By formula the values for the sinking fund annual payment (SFP) and the value at the end of the year n are:

                                                                                 i

                                    SFP     =          (P - S)  ---------------

                                                                         (1 + i)^L - 1

 

                                                                            (1 + i)^L  -  (1 + i)ⁿ

                                    V_n          =          (P - S) [   ------------------------ ]  + S

                                                                                 (1 + i)^L  - 1         

                                     D_n+1       =          V_n - V_n+1

Where,

D_n+1       =          amount of depreciation charged for year n+1, Rs./year

V_n          =          remaining value at the end of the year n, Rs.

V_n+1       =          remaining value at the end of the year n+1, Rs.

P          =          purchase price, Rs.

S          =          salvage value, Rs.

i           =          interest rate, fraction

L          =          life of machine, years

Interest on Investment: A large expensive item after depreciation for agricultural machinery is the interest. It is a direct expense item on borrowed capital. Even if cash is paid for purchased machinery, money is tied up that might be available for use elsewhere in the business. Interest rates vary considerably but usually are between 12 and 16 percent. Annual interest is calculated on an average investment by using the prevailing interest rate by the following formula:

                                                             P  +   S        i

                                    I           =          ------------ x -------          

                                                                  2           100

Where,

            I           =          annual interest charge, Rs./year

            P          =          purchase price, Rs.

            S          =          salvage value, Rs.

            i           =          interest rate, per cent

 

Insurance and Shelter: Insurance and shelter charges together are taken @ 2% of the purchase price per year.

VARIABLE COSTS

Repair and Maintenance Costs: Repair and maintenance costs are considered as an essential and significant part of machinery ownership.  Occasional repairs and periodic maintenance are required to maintain a machine in good working order and ensure a high degree of reliability.  The more a machine is used, the greater is its need for repair.  The factors necessitate the repairs in a machine are routine wear, accidental breakage or damage, operator’s negligence and periodic overhauls. Repair costs consists of the expenditures incurred for the spare parts and the labour for repairs made in a shop or on the farm.  Repair costs vary from one geographical region to another because of the differences in machinery use, labour wages and prices of spares.  Repair costs increases with the age of a machine but tends to level off, as a machine becomes older.  The accumulated repair and maintenance costs (TAR) at any point in a machine’s life can be estimated by using the following formulae (IS: 9164 - 1979):

For four - wheeled and crawler tractors                               TAR    =          0.100 X^1.5           

For stationary power units and two-wheeled tractor           TAR    =          0.120 X^1.5

For agricultural trailer                                                      TAR    =          0.127 X^1.4 

For PTO-driven combine, seed drill and Sprayer                TAR    =          0.159 X^1.4

For plough, planter, harrow, ridger and cultivator                TAR    =          0.301 X^1.3

For seed cleaner                                                               TAR    =          0.191 X^1.4

For self-propelled combine, dozer and scraper                   TAR    =          0.096 X^1.4

 Where,

            TAR    =          total accumulated repair cost divided by purchase price of

                                    machine, expressed as percentage

            X         =          100 times the ratio of the accumulated hours of use to the wear

                                    Out life

Fuel and Oil Cost: With tractors and other powered farm equipment, the cost of fuel and oil must be included in the total machine charge.  Power required may be estimated as follows:

                                          D S

                        Dbhp   =   --------

                                          270

Where,

            Dbhp   =          drawbar horse power, hp

            D         =          draught, kg_f

            S          =          speed, km/h

Or,

                                        D S

                        dbhp  =   -------

                                         3.6

Where,

            Dbhp   =          drawbar power, kW

            D         =          draught, kN

Fuel consumption can also be estimated by the following equation:

                        F          =          LCF x RHP x SFC/1000

Where,

                        F          =          fuel consumption, l/h

                        LCF     =          load coefficient factor for the operation

                        RHP    =          rated horsepower of the power source, hp

                        SFC     =          specific fuel consumption, ml/hp/h

 

The values of LCF and SFC for different operations and power sources are given in Table 2.

 

Table 2: Values of LCF and SFC for different operations and power sources.

Power source	Type of work	LCF	SFC (ml/hp/h)
Stationary diesel engine	-  Water lifting	0.6	220
	-  Threshing	0.7	220
Tractor	-  Light works e.g. transport, water lifting e	0.4	210
	-  Medium work e.g.  secondary tillage, sowing,     inter-culture etc.	0.5	210
	-  Heavy works e.g. primary tillage, Sheller, cane crusher, combine etc.	0.6	210
Self-propelled combine	-	0.6	210
Small petrol engine	-  spraying, dusting etc.	0.8	500

 

Oil costs          =          0.20 x Fuel costs

Labour Charge: The cost of operator and labour is calculated from the actual operator and labour charges paid in Rupees per day at the prevailing rates in that region.