THE INTRODUCTION:
The company in question is a JV of India’s leading oil marketing and gas distribution companies. The company’s product portfolio includes Compressed Natural Gas (CNG), catering to more than ~14 Lacs CNG vehicles and Piped Natural Gas (PNG), catering to more than ~21 Lacs domestic PNG customers.
THE PROBLEM:
Compressors and dispensers are the principal equipment used in a CNG station for filling CNG in vehicle tanks. The operational costs of these types of equipment are primarily maintenance-related. Therefore, the company in question needs assistance in designing a framework for strategic decision-making to enable accurate gauging of maintenance costs of in–house vs. outsourced compressors and dispensers.
In addition, given the company’s huge customer base, the availability of stations during working hours is paramount. This renders the correct computation of costs a challenging process compounded by the additional burden of resource requirements during the maintenance of compressors and dispensers.
THE SOLUTION:
To evaluate the cost of maintenance, the compressors and dispensers are initially categorised into in–house and outsourced categories. These outsourced compressors/ dispensers are further subcategorised into AMC (machines under warranty) and CAMC (after the machines’ warranty has expired).
The costs so ascertained are then allocated to the different makes/ models of the compressors/dispensers based on capacity, which is the most reasonable and scientific basis, using the cause-and-effect principle in accordance with the relevant Cost Accounting Standards issued by the Institute of Cost Accountants of India. This trend analysis was performed and studied on three years of cost data. Identification of cost elements and the cost computation of compressors/ dispensers’ category
specific are as follows:
Cost Elements | Cost Computation |
In–house maintenance | |
Direct Employee Cost | Includes the salary/cost to the company (CTC) of station technicians deputed for the operation and maintenance of compressors/dispensers. |
Cost of Spares and Consumables | Includes the consumption cost of spares, lubricants, oil, CO2, etc., for the maintenance of compressors/dispensers. |
Repair and Maintenance Cost (R&M) | It includes the following costs:
|
Cost of Contract/Procurement | It includes costs that pertain to the procurement department (identified through the cost centre):
|
Stores and Inventory Carrying Cost | It includes the following costs:
|
Other Cost | Other costs include vehicles hired for in-house equipment maintenance. |
Outsourced Maintenance | |
Outsourcing Charges | These are the annual maintenance charges (AMC). |
Cost of Contract/Procurement | Procurement department's responsibility is to initiate and complete the AMC/CAMC tendering process. The cost formula is the same as that of in-house maintenance, and the cost is segregated into in-house and outsourced equipment based on the equipment’s capacity. |
Maintenance Cost | It includes the employees’ costs pertaining to the maintenance department (identified through the cost centre). The cost is segregated into in-house and outsourced equipment based on the equipment’s maintenance frequency. |
Hiring of Vehicle Cost | It includes vehicles hired for outsourced equipment maintenance. |
THE RESULTS:
Weighted average cost/Equipment/Month analysis was observed for all three years. It was concluded that equipment’s in–house maintenance activity is more economical compared to equipment’s outsourced CAMC maintenance activity. Another observation was that following the procurement of the new equipment (Outsourced AMC category), the maintenance activity was at a minimal cost given the machines are new, under warranty, and require minimum maintenance.
Weighted Average Cost/Equipment/Month (3 Years) in relative terms
In-house (after the machines’ warranty has expired) | Outsourced CAMC(after the machines’ warranty has expired) | Outsourced AMC (machines under warranty) |
100 | 120 | 10 |
FREQUENTLY ASKED QUESTIONS:
What is cost behaviour analysis?
Cost behaviour analysis is a process of understanding how costs change with changes in volume or activity levels. It helps companies identify fixed and variable costs and determine how changes in volume or activity levels affect total costs.
What is in-house equipment maintenance?
In-house equipment maintenance refers to the process of maintaining equipment using the company's own personnel and resources. This can include routine maintenance such as cleaning, lubrication, inspection, and more complex repairs and overhauls.
What is outsourced equipment maintenance?
Outsourced equipment maintenance refers to the process of hiring an external vendor or service provider to maintain equipment. This can include routine maintenance as well as more complex repairs and overhauls.
Why is it important to analyse the cost behaviour between in-house and outsourced equipment maintenance?
Analyzing the cost behaviour between in-house and outsourced equipment maintenance is important because it can help companies identify the most cost-effective maintenance strategy for their equipment. By understanding the fixed and variable costs associated with each approach, companies can make informed decisions about resource allocation, pricing strategies, and production planning.
What are some factors to consider when comparing the cost behaviour of in-house vs. outsourced equipment maintenance?
Factors to consider when comparing the cost behaviour of in-house vs. outsourced equipment maintenance include labour costs, equipment costs, materials costs, training and certification requirements, and downtime costs. Additionally, companies may need to consider the level of expertise and resources required for different types of maintenance activities.
How can companies determine the most cost-effective approach to equipment maintenance?
Companies can determine the most cost-effective approach to equipment maintenance by analysing the fixed and variable costs associated with in-house and outsourced maintenance and comparing these costs to the expected benefits of each approach. Factors to consider include labour costs, equipment costs, materials costs, training and certification requirements, and downtime costs. Additionally, companies should consider the level of expertise and resources required for different types of maintenance activities.
CONTACT US
Reach us if you have any concerns regarding cost management accounting issues in your organization.
SANKALP WADHWA
Partner, Chandra Wadhwa & Co. (Cost Accountants) | B.Com, FCMA, ACA, DISA | Certified SAP-CO Consultant | Executive Program on Management and Finance (IIM, Ahmedabad)
Address: 1305 & 1306, Vijaya Building, 17, Barakhamba Road, New Delhi - 110001, India Mail: sankalp.wadhwa@cwcindia.in
Tel: +91-8800018190, +91-7503703599.
Website: www.cwcindia.in