Calculating the operating costs of industrial machinery helps companies optimize manufacturing processes that, in turn, can directly influence a company’s income and, therefore, profit. The costs of operating a machine are dependent on the industry. However, there are a number of basic principles that can be applied, no matter the industry, to help a company calculate its costs of operation for machinery and equipment used in manufacturing its products. Let’s take a look at what these principles are:
Machine vs Production Costs
Industrial machinery costs and production costs are figures necessary for the successful operation of a manufacturing business. In order for a company to be profitable, the product it manufactures must generate more revenue than it costs to produce it. Companies then must evaluate their total expenses with a degree of accuracy and confidence to achieve profitability. Machine vs. production costs factor into the overall expenses of running a company. Neither cost should be calculated in isolation but considered as a part of a larger equation. Production costs represent the total expenses related to the operational costs of doing business as a company, while industrial machinery costs are those expenses related to the means of making the product. The operating costs of each are determined by combining fixed and variable costs that are calculated at yearly and hourly rates.
Explanation of Fixed and Variable Costs
The annual operating cost of industrial machinery is part of a broader equation that is affected by two distinct types of costs, fixed and variable. Where one cost is a certain amount, the other can fluctuate. Fixed costs remain the same even as the volume of production rises or falls. Variable costs do not. Such costs increase or drop with the volume of production. A good example of each—when companies acquire industrial equipment that machinery is considered an investment, i.e., an asset, not a cost. However, its annual depreciation is certain and unaffected by the volume of production. Therefore, it is a fixed cost. The cost of repairing that machinery each year can vary in direct proportion to the volume of production. Therefore, those costs are variable.
Calculating Hourly and Annual Costs
The cost of running a machine per hour factors into its yearly cost. The objective here is to arrive at a figure that represents a reasonable estimate of the cost of operating the machine. Knowing the cost is as much about managing it as it is a primary method of absorbing factory expenses to that of production. The difference between calculating hourly and annual costs of machine operation relates to the variable and fixed costs of operating it. As mentioned, fixed costs do not stop when the machinery does. The depreciation, insurance, and interest of investment are not linked to the volume of production. They are yearly costs. However, the amount of lubricant used, routine maintenance or repairs, and energy consumption are linked to production. To calculate the annual operating cost of industrial machinery, multiply the annual hours of operation by the variable costs and add that figure to the annual fixed costs. That number is the cost of owning the machinery.
Unexpected costs are those unplanned or hidden costs that can lead to a setback or delays in production that affects a company’s bottom line. Downtime due to a machine breaking down is a good example of an unexpected cost. Reliability of industrial machinery is a must. Another example is during machinery changeovers. More a hidden cost than unplanned, when the same machine is used to produce different parts or components it may require a changeover, i.e., refitting the machine with different attachments to accommodate given production. Either of these unplanned or hidden operational costs are difficult to calculate. Keeping detailed records of unplanned downtime, predictive maintenance, and effective planning of changeovers can help offset and factor in unexpected costs.
However, all operational costs associated with industrial machinery can be mitigated with and benefit from custom automation engineering. Industrial automation allows manufacturers to increase productivity through computerized technologies and applications that, among many benefits, will reduce operational costs of machinery. Introducing automation into an industrial manufacturing environment streamlines processes for greater efficiency and increased quality.
EAM Inc. is a leader in providing custom industrial automation solutions for a wide range of industries. Cost-effective and innovative, EAM engineered automated machinery and support helps companies manage operating costs for industrial machinery to better improve efficiency, reduce waste and increase profitability.