Costing in the Australian hardwood logging industry

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.