Costing in the Australian hardwood logging industry
Date
1971
Authors
Groves, Kenneth William
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Abstract
An accurate knowledge of costs and returns is of
importance to the logging industry as a means of assessing
the efficiency and profitability of a logging operation and
as an aid in the selection and management of new machines.
Likely returns are known or can be predicted with
reasonable accuracy since they are usually based on contract
rates per unit volume felled, snigged, loaded and/or delivered
to mill and the annual volume which can be logged in most
hardwood operations in Australia is controlled within fairly
restricted limits. Costs, on the other hand, are frequently
not known in sufficient detail by logging contractors and
there is often some doubt about the exact nature of some of
the costs and the way in which they should be defined and
determined. Survival becomes the only measure of efficiency,
an unsatisfactory criterion in any industry but particularly
in one which has been described as ailing.
The logging research section of the Forestry and
Timber Bureau, Department of National Development, developed
a costing procedure in the nineteen sixties intended to
help any small contractors to allocate actual costs in a
rational way; to estimate likely costs for a given logging
machine; and to determine average hourly costs, which could
then be related to hourly rates of production, from which
unit costs could be derived.
This procedure suffered from a number of shortcomings;
the main one that it did not take account of possible year
by year variations in costs which could have an important
effect on a contractor's net cash flow and thus his
financial liquidity. Furthermore it did not permit a
sufficiently rigorous examination of alternative methods of
acquiring logging machinery as an investment. This thesis
presents another approach which not only takes account of
year by year variations in costs and net cash flows but
still enables an average hourly cost at any specified rate
of return to be calculated by discounting costs to year
zero at the required rate of return and converting the
total discounted cost to an annuity over the life of a
machine at the same rate of return. This has the important advantage of allowing analysis of both cost and investment at
the same time. It still suffers from the same disadvantage
as the Forestry and Timber Bureau's procedure in that it
gives only an average annual or hourly cost over the life
of a machine. However , since annual costs must be known
or predicted in order to calculate average hourly cost these
important variations from year to year must be apparent.
The costing procedure also permits before-tax and
after-tax analysis of the internal rate of return and net
present value at various rates of interest of investment
in a single logging machine at three proposed levels of
revenue. Carrying the analysis a stage further, and taking
as an example a tracklaying tractor commonly used throughout
the logging industry, those levels of production
which will give an adequate return at specific contract
rates are estimated.
The conditions necessary to ensure that these levels of
production can be attained are discussed and it is suggested
that the hardwood logging industry must be re-structured if
it is to bring itself up to date and continue to survive
in an increasingly competitive world.
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