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Maintenance Management (Text Level)
Part 4: AccounƟng for Maintenance
AccounƟng ... | Using InformaƟon ... | Performance ... | Review #4 ...

AccounƟng for Maintenance

Session Headings:

Principles of AccounƟng for Maintenance

( See Summary for main points)

The statements you will see are mainly for the purpose of management control.
SomeƟmes they will have items on them that you can't control; if these are needed for
some other accounƟng purpose, and don't affect your ability to use the reports for
control this is fine. If, however, they can not be used for control very easily, then get
them changed. Monthly statements are a service provided to you the customer, make
sure they do serve or complain.

The following notes go through the general principles of accounƟng for maintenance
and deal with the special dual responsibility of maintenance. It may come as a shock
to you, but accounƟng is not an exact science. Any system involves a number of
compromises and is based on assumpƟons that are not always accurate. The best
system is sƟll dependent on the accuracy of the informaƟon you and others put into it.

Understand Responsibility AccounƟng Applied to Maintenance

( See Summary for main points)

The principle of responsibility accounƟng is very simple. You charge the costs of an
operaƟon to the unit or department that incurs those costs, and expect the
supervisors and managers of those areas to control those costs. As you go up the
management ladder, senior managers receive cost statements summarizing all their
units, and the General Manager receives a summary of all costs, since all costs are his

In pracƟce, this is not always so simple. For example, is the cost of a machine overhaul
a maintenance responsibility or the responsibility of the department that operates
the machine? Of course, this is a shared responsibility. In fact, most maintenance costs
are shared responsibiliƟes, since most maintenance work is providing a service to
other departments.

If all maintenance costs were charged directly to the departments receiving the
service, they would not show on the maintenance manager's responsibility statement,

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and he can certainly exercise some control on these costs. If these costs were only
shown on the maintenance reports, then the operaƟng departments would not know
their true costs, and also they might not be as careful in looking aŌer equipment,
regarding maintenance costs as 'free'.

The soluƟon to the above is to show the costs on both the maintenance statements
and the statements of the departments serviced. A convenient way of doing this is to
use the work order number as a temporary account number. Labour and materials can
be charged to this. The work order idenƟfies both the maintenance crew, and the
department for whom the work is done (usually the department is idenƟfied by a cost
centre number). At the end of an accounƟng period, all completed work orders are
costed to the maintenance crew that did the work, and also charged out to the
department serviced. There are several ways of showing this, but one would be as

There would, of course, be more detail than this in the statements.

Material Costs

( See Summary for main points)

While labour is almost always charged out using work orders in responsibility
accounƟng, materials can be treated several different ways. When materials are
purchased or issued, if they are for a specific maintenance job they can be charged on
the requisiƟon or purchase order to the work order number. SomeƟmes material will
be charged directly to end user account numbers. This should be avoided and all
maintenance labour and material costs should be charged to a work order. This is for
two reasons:
1. By charging to the work order, the costs will show on the maintenance supervisor's
report, and then by charge out on the end user's report.
2. The work order is used to build up historical maintenance costs for equipment and

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services. This is used in budgeƟng, planning and making equipment replacement

decisions. It is important therefore that all the costs are reported through work orders.

Short Cut Systems

Beware of systems that distribute costs by a formula. 40% to the mine, 40% to the mill,
20% to other, for example. They are usually set up to reflect an actual distribuƟon at
some point in history, but over Ɵme this changes. Also, there is less pressure on users
to control costs, since all costs are shared.

Systems that charge all costs to maintenance, and then treat maintenance costs as
part of overhead costs also avoid the responsibility issue. Again, this is a poor system
for cost control.

Remember, accounƟng systems are tools for managers to use, not systems that must
be fed with informaƟon to saƟsfy accounƟng. If your system doesn't provide you with
the control informaƟon you need, work with the accountant to change it.

AccounƟng for Mobile Equipment Costs and Charging Users

( See Summary for main points)

There are two basic classes of mobile equipment, and the treatment of their costs
should not necessarily be the same.

Service Equipment: This will include cranes, trucks, uƟlity vehicles used by the
maintenance department to provide service to other departments.

ProducƟon Equipment: This will include units like scoop-trams, trucks and other
vehicles, used by operaƟng departments, but maintained by maintenance.

There is no perfect way to charge for the use of this kind of mobile equipment. One
technique is to create a 'mobile equipment pool' cost centre, and charge all costs of
parts, repair, labour, fuel, depreciaƟon, etc., to this code.

Charge rates per hour are then developed for each equipment type, and user
departments are then charged per hour of operaƟon. If costs go up, the hourly charge
rates are adjusted, but someƟmes this adjustment is only made at the annual budget
Ɵme. The argument for this is that it puts pressure on maintenance, to keep costs
in-line with charge outs. A poor feature of this system is that the operaƟng
department that takes care of it's equipment, resulƟng in lower maintenance costs, is
charged the same hourly rate as a department that is negligent and regularly causes
damage to machines. A possible soluƟon to this problem is to charge repairs for fair
wear and tear to the mobile equipment pool, and repairs due to damage, to user
department. The difficulty with this is the bias of the person making the decision on
where to charge.

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Understanding Monthly Cost Statements

( See Summary for main points)

For day-to-day and week-to-week control of maintenance, reports, dealing in hours,

performance, overƟme, planned and unplanned work are the most useful. However, a
mine is in business to make a profit, and maintenance acƟviƟes can account for a very
large part of operaƟng costs. Including repair parts it may be as much as 50% of
operaƟng costs. It is obviously, therefore, very important to report these costs
accurately, in a way that will permit costs that are becoming too high to be controlled.
In an earlier lesson, we indicated that this is done by reporƟng costs monthly against
the area responsible for those costs. In maintenance, this usually means a report for
each crew, and a summary report combining all maintenance costs. We will look at
the structure of a typical Crew Monthly Statement, and then an overall report for a
maintenance department.

Crew Monthly Statement

( See Summary for main points)

The statement shown is for a single crew. The most useful format is to show the figures
for the month, and the year-to-date compared to a target, usually the budget. Under
descripƟon, there is a list of items that will correspond to accounts in the mines
accounƟng system. Although you may be able to have some of these changed to
provide more useful informaƟon, in general they will be established based on the
accounƟng system, and the accounƟng principles being used. In the example, it is
assumed that fringe benefits such as EI, CPP and vacaƟon pay are included in the
salary and wages numbers. It will not help you do anything differently if they are
shown separately.

Crew supplies are those items used by the crew, for example welding rod, safety
clothing, repair parts for crew equipment and so on. If it is useful these can be listed in
more detail on the statement.

Office supplies are the forms and staƟonery used by the crew. It is likely that these
costs are very low, and may simply be shown on the maintenance manager's
statement for all crews combined. They may even be removed totally from the
maintenance statements, and shown as part of administraƟon.

Travel costs are simply the costs of any trips to other properƟes, conferences,
suppliers, etc.

TransportaƟon is the cost of say a half-ton truck used by the crew. Again, how this and
other mobile equipment is shown will depend on the system in use for charging out
mobile equipment.

UƟliƟes and Services If the accounƟng system is aimed at distribuƟng all costs
(someƟmes done so that true producƟon costs can be established) then a porƟon of

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the uƟlity bills will be allocated to the crew.

G & A and DepreciaƟon As with uƟliƟes, there may be an allocaƟon of charges to the
crew. There is liƩle the crew supervisor can do to control these, and if they are
included it is for accounƟng purposes only.

Total This is the total cost of all those accounts listed as the responsibility of Crew 1.

Charge Outs These are the costs charged out to users, usually on the basis of hours
worked captured by the work order system. In a full distribuƟon of costs system, the
charge out rate per hour will be set so that on average the net costs for Crew 1 are
zero. All costs end up distributed to producƟon crews, so that total producƟon costs
per ton per work area can be calculated. This allows management to decide on which
area it is profitable to mine, and which mining methods are most cost effecƟve.

The Net Costs are the difference between charge outs and total costs. This should be
close to zero, if it conƟnues to grow, then the charge out rates must be increased.
Some accounƟng systems do not charge out, or else simply divide the total amongst
the operaƟng departments. Clearly this is not as useful for management decision

The OperaƟng StaƟsƟcs secƟon at the boƩom of the statement is opƟonal. Its purpose
is to combine on one report sheet those important staƟsƟcs that will be of use to

Maintenance Managers Monthly Statement This will be in the same form as the Crew
Statement. It will start with some cost items that are for administering the whole
department. For the sake of confidenƟality, all supervisors' salaries may be lumped as
one item on this statement and not shown on the Crew Statement. Clerical and
planning staff and their supplies, travel, etc., will also appear. The crew statements
will be shown simply as totals, and the charge outs will also be shown. The list of
items might be as follows:

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Understand Basic BudgeƟng Principles

( See Summary for main points)

To many managers (all foremen are managers) budgeƟng is an annual chore that has
to be completed to saƟsfy the AccounƟng Manager, who may in turn tell them that it
is something 'required by head office'. It is completed with as liƩle understanding as
possible and then forgoƩen unless senior management makes an issue of it. OŌen
too, budgeƟng is just done at a department head level, and foremen do not see or
understand it. BudgeƟng is a very important process that forecasts what total costs
and revenues will be. It forecasts whether there will be a profit or not, and provides
valuable management informaƟon that will help in making decisions on operaƟons.

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Poor budgeƟng and control have probably been the cause of more business failures
than any other cause.

In a responsibility budgeƟng system, which is definitely the preferred system,

budgeƟng should be pushed down to each supervisor responsible for a responsibility
centre. At budget Ɵme, an informaƟon package should be prepared for all who must
budget, indicaƟng such things as:

Expected wage and salary increase in the budget year

OperaƟng plan for the budget year giving tons, equipment to be used, work
areas, mining methods, etc.
Capital plans, new buildings, tailings ponds, etc.
Expected inflaƟon
Any other guidelines relevant to budgeƟng

Depending on the complexity of the issues it may make sense to have a formal
presentaƟon of this package to all budget managers with a quesƟon and answer

The budgeƟng process itself is one of building by adding the costs of the services to be
provided to meet the operaƟng plan. The tradiƟonal way of budgeƟng is to take the
previous year's figures, add inflaƟon and that is it. This is a very sterile process. It says
you will not learn to do anything beƩer and you will be providing exactly the same
services as last year. A much more producƟve technique is to use the 'zero based'
approach. Assume you have nothing, and then idenƟfy the 'mission' of your crew. This
may be 'To keep all mobile equipment operaƟng efficiently, so that the operaƟng plan
can be achieved, at the least combined operaƟng and maintenance cost'. From the
mission you can idenƟfy several key objecƟves:

Provide prevenƟve maintenance to all units

Provide breakdown maintenance to all units
Rebuild the following parts as they are replaced, part l, part 2, part 3, etc.,
and perhaps others.

From a knowledge of how much equipment there is, expected operaƟng hours and so
on, you can now build up the size of crew you will need, their skills, the equipment
they will need, supplies, travel and so on. You have in fact developed a budget from a
zero base. There will be some charges that may be allocated to your area that you will
have to obtain from others. You are now in a posiƟon to set out your budget in the
form of the monthly statement.

Some of the problems you must consider are:

plant shutdown
overƟme premiums
outside contractors

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repair parts

Repair parts may end up on an operaƟng manager's budget, but he will need help
from you in idenƟfying what they should be.

Understand How to Use Budgets to Control Costs

( See Summary for main points)

Like most plans a budget has liƩle value if it is prepared and then forgoƩen. A budget
is a management tool. It provides a guideline against which to measure actual results,
and when they differ substanƟally it will help you to find out why, which is the first
step in deciding on correcƟve acƟon, if any is necessary.

We must not forget that a budget is based on assumpƟons. If producƟon is increased

substanƟally, and this was not forecast, obviously maintenance costs will increase,
probably exceeding budget. SomeƟmes in such situaƟons the budget is revised.
Another way to deal with changes in producƟon tonnage, is to convert your budget
into a 'flexible' budget. This is done by taking each item on your budget and deciding
how much is 'fixed' that is the cost will not change regardless of producƟon tonnage,
and how much is 'variable' and will vary with producƟon tonnage. For example, with a
mobile equipment crew, you might decide that 30% of the crew payroll is fixed,
covering planning, and looking aŌer surface vehicles, and 70% is variable, maintaining
producƟon units that increase as tonnage increases. Obviously a fair amount of rough
esƟmaƟng is involved, but over Ɵme these will improve. The result is a total fixed and
variable figure for the crew. Now if tonnage changes, you can alter the variable part of
your budget in proporƟon, and thereby have a new control measure against which to
compare actual costs.

When Costs are too High

( See Summary for main points)

The first step is always to find out why. OŌen it is not sufficient to know that a certain
account was overspent, you need to know what caused it. This is where you make use
of the accounƟng department. For every account they will have a record of all the
detailed transacƟons that lead to the total. Ask to see this and you will discover where
the unexpected costs come from. It is a good idea to use an excepƟon system where
you automaƟcally check any account that is more than plus or minus of a given
percentage from the expected amount.

There are oŌen things you can do to reduce costs. For example, are you cleaning
offices too oŌen? Can you have something done outside cheaper than you can do it?
Can you do something for less than you are paying to have it done outside?

A good manager uses the budget all the Ɵme and will always know if he or she is

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ahead or behind. If you do not monitor costs you can be sure you are paying too much
for something.

ConƟnue with Using InformaƟon

AccounƟng ... | Using InformaƟon ... | Performance ... | Review #4 ...

Maintenance Management

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