 The fourth subsystem of the equipment management system is financial management. This subsystem deals with cost accounting, budget, equipment rental rates, and equipment funds. These four elements are essential for developing a financial management system. Many equipment decisions must be supported by sound cost information. Most agencies will already have in place accounting and budgeting procedures. Many will also have a form of equipment rental or chargeback. Dealing with the design of the EMS in these areas requires coordination and communication with those agency divisions with accounting and budgeting responsibilities. Cost accounting is the systematic process of defining equipment expenses and distributing them to the specific equipment cost elements. Any financial management accounting system needs to serve a two-fold purpose. Financial accounting and operational control. In designing the cost accounting system, the objective should be to give managers a picture of operating costs that relate specifically to their responsibilities and decisions. Costs to be tracked in the cost accounting system should be tailored to line managers' functional responsibilities and be consistent with factors that have a significant effect on desired operating objectives. Several key cost classifications should be incorporated into an equipment cost accounting system. The first classification is maintenance repair. This would include direct labor and parts charged directly to equipment units, direct charges, and significant volumes of indirect costs such as miscellaneous parts and shop overhead. Fuel and lubricants. Fuel costs should include all consumable operating supplies and the costs of distributing them. Parts distribution costs. These include all costs of maintaining and operating parts, store rooms, and shops. Miscellaneous parts costs. Miscellaneous parts costs include the price of all common, high use, low unit cost items placed in shop bins for uncontrolled access. Shop overhead costs. Shop overhead costs should include all non-direct charges connected with the supervision, operation, and maintenance of central and field repair shops. General management and administration costs. These costs are incurred to support the planning, funding, operation, and maintenance of the equipment fleet. Non-operational costs. Non-operational costs include equipment depreciation and capitalized equipment betterment or rebuild costs. Equipment depreciation would be charged to equipment units on the basis of charges from equipment asset accounts. The final key element of the cost accounting system is a systematic mechanism for allocating indirect costs to specific units or classes of equipment. In the foregoing structure of equipment related costs, indirect costs are those that would not be charged directly to individual units of equipment. As with cost accounting, the agency will probably have some type of formalized budgeting procedures in place. The objective should be to develop budgeting procedures that support and enhance the existing system. Budgeting is much like planning. There will be considerable overlap between the budgeting system and planning. To the extent possible, budgets should be performance-based and keyed to the level of fleet size, availability objective, and projected utilization. The first step in designing the budgeting system is to determine responsibility. These responsibility centers generally should correspond to the major equipment management functions. The budget system should incorporate a standard development process for each program and include the following five steps. Step 1. Establish goals and objectives. To the extent possible, the goals and objectives should be quantifiable and form a basis for defining the workload and for measuring performance. Some specific objectives might include maximum allowable downtime, replacing all vehicles meeting replacement criteria, and achieving average utilization rates by class. Step 2 is to define strategies. Once the goals and objectives are established, strategies for meeting them must be defined. For example, suppose the fleet manager has established an objective of reducing downtime for dump trucks from 12% to 10%. A strategy must be formed. Perhaps it can be met with more training, more use of commercial repair shops, shifting alternatives so that PMs or other types of work are performed on night shifts, thus increasing the time that the vehicle is available to the user. Increased staffing and operator training. Step 3 is to establish budget guidelines. Standardized budget development and procedures should be established for preparing and submitting the budget. Step 4 is budget review and approval. The size of the organization and the organizational structure will dictate the steps of the review and approval process. The fleet manager should be involved in the development of the budget from the beginning so that a formal approval check-off is not needed. Step 5 is budget implementation. The final step of the budget development process is implementation. This may involve including the performance-based equipment budget into the overall agency budget. The last element of the budget system is cost control. The primary reason for developing performance budgets is to improve cost control. Line managers such as the shop supervisor and parts manager must be closely involved in preparing the budgets. Cost reports showing levels of cost actually incurred against costs budgeted should be prepared regularly and distributed to the managers directly responsible for the area budgeted. Operating budget and cost performance reports should show actual and budgeted costs for the past period and year to date. The report entries of primary importance are year to date budgeted and actual costs since it is this data that normally provide the clearest picture of significant cost trends. Equipment rental rates provide the means to view the total costs of owning the equipment, showing costs to users in this manner. Also has the effect of pricing equipment availability and usage. There are a number of alternatives for developing a system of rental rates. The most effective is a two-part rate comprised of ownership rate and operating rate. A rental rate should be established for each class of equipment. Some equipment such as air compressors and trailers would have only an ownership rate since there is no way of measuring usage. Another method of establishing rental rates is to have a single rate that reflects all the costs. While many agencies use this approach, it is not as accurate because usage and therefore usage related costs can vary during the year. Updated rental rates should be developed each year prior to the budgeting cycle for use by agencies in developing their budgets. It is never possible to project precisely the rental rates, especially during high inflationary periods. Although relatively steady now, fuel costs have been extremely volatile. Once rental rates are established, user agencies are charged monthly on the basis of the equipment units they use. The ownership rate would be a flat monthly charge for each equipment unit regardless of usage. The primary purpose of an equipment fund is to provide the fleet manager with the funds necessary to replace equipment when it is most economical. In turn, this difficulty results in the expenditure of a proportionately greater amount of operating funds to maintain overaged equipment. It also results in reduced equipment reliability. Replacing equipment when it is most economical implies the development of a planned, well-administered turnover that will be relatively consistent from one year to another. An equipment fund guarantees the availability of funds to carry out such a program. Under the equipment replacement fund concept, all replacement costs would be recovered from equipment users through the rental rate system. Using rental rates to recover these costs involves transferring funds from user budgets to an equipment fund reserve account. Depreciation would thus be treated as a cash expenditure for the user, and the cash flow resulting from depreciation charges would be set aside for the eventual purchase of replacement equipment. Funds credited to the equipment fund should not be required to be spent in their entirety by the end of the budget period. This would defeat much of the fund's purpose in giving the fleet manager the flexibility to time purchases with manufacturing cycles. If an equipment fund is properly managed, it should, on average, have a continual balance, equal at least, to the straight-line annual depreciation value of the entire complement. Money set aside in the fund would be drawn on to fund the purchase of new equipment as equipment reaches an optimum replacement age and as procurements are scheduled to meet these needs. The use of an equipment fund should result in equipment that is turned over at a planned, controlled rate on the basis of ownership and maintenance economies. In turn, equipment should be reduced in age and increased in reliability in many places, and the total expenditure of operating and capital funds should be controlled more effectively. In this course, we have covered the basics of the financial management subsystem. We dealt with cost accounting, budgeting, equipment rental rates, and equipment funds. Cost accounting is the systematic process of defining equipment expenses and distributing them to specific equipment cost elements. The key cost classifications in a good cost accounting system include maintenance repair, fuels and lubricants, parts distribution costs, miscellaneous parts costs, shop overhead costs, general management and administration costs, and non-operational costs. Budgeting is much like planning. To the extent possible, budgets should be performance-based and kept to the level of fleet size, availability objective, and projected utilization. Equipment rental rates provide the means to view total costs of owning equipment. Showing costs to users in this manner also has the effect of pricing equipment availability and usage. Equipment funds provide fleet managers with the funds necessary to replace equipment when it is most economical. Replacement costs are recovered from equipment users through the rental rate system. For more information on this or other IRF videotapes, write to the International Road Federation or call the numbers on your screen.