Techno-Economic Determination of the Service Life of Machines

V. F. Vasyutin

(Presented by the scientific and technical seminar of the Department of Mining Machines and Mine Transport)

The fixed assets of the national economy of the USSR have a dual expression: natural-material and value. In the process of productive consumption, the natural-material expression of fixed assets is manifested in their physical wear, and the value (monetary) expression in depreciation. Physical wear is the loss by individual elements of fixed assets of their consumer properties. Depreciation is the process of transferring parts of the value of fixed assets to the cost of production in accordance with wear.

All fixed assets, both those in use and those idle, are subject to physical wear. Only those that participate in work depreciate. Therefore physical wear acts as the material-substantive basis of depreciation and is determined through the average annual wear of the instruments of labor in use. With an increase in the degree of load and the shift coefficient, the depreciation rate increases. However, physical wear and depreciation do not proceed in parallel.

K. Marx pointed to three periods in the life of a machine: the running-in period, the period of normal operation, and the period of progressive increase in wear.

If the service life of individual parts or assemblies of a machine is determined by their wear resistance, then the service life of the machine as a whole is affected by moral depreciation. Moral depreciation shortens the boundaries of physical wear.

As has already been indicated, the physical wear of instruments of labor, even under the same load, proceeds unevenly, whereas their depreciation is taken in the USSR as a constant quantity. The average depreciation of fixed assets per year is determined by dividing the balance-sheet value by the service life, which is established on the basis of experimental data and theoretical calculations. The increase in production and transport equipment in the coal industry has in recent years led to an increase in depreciation of fixed assets with only a slight rise in amortization deductions.

Since the parts and assemblies of machines wear unevenly, additional expenditures for current,

medium and major repairs. But from the economic point of view, only major repairs affect the extension of the service life of machines. Major repairs are carried out at the expense of depreciation deductions, and wear is reduced by this amount. The annual amount of depreciation is

\[ A_g=\frac{P_c+Z_k-O_c}{C_c}, \]

where \(P_c\) is the initial cost of fixed assets;
\(Z_k\) is the cost of major repairs;
\(O_c\) is the residual value;
\(C_c\) is the service life.

At present, in the coal industry, major repairs of mining equipment are carried out centrally and are financed by combines through the redistribution of the mines’ depreciation funds allocated for major repairs. With such an arrangement, mines have ceased to pay proper attention to medium and current repairs, since their cost is included in the cost of production. Moreover, from the repair plant the mine receives not the particular machine it turned in, but any ready machine from the exchange stock. Therefore, in order to improve the quality of repair work, the role of medium repairs should be raised to the level of major repairs and they should be carried out at the expense of the mine’s working capital. Thus, through the mechanism of cost accounting, the utilization of the active part of fixed assets can be considerably improved.

In the mining industry it is necessary to raise the depreciation rates for mining equipment. The coefficients of wear of fixed assets in the USSR are half those in the USA. American monopolies, with the aid of state subsidies, carry out accelerated depreciation. For this purpose, in contrast to the average depreciation rate adopted in the USSR, the USA uses the double-declining-balance method and the sum-of-the-years’-digits method, or cumulative method, which make it possible to take into account the moral obsolescence of machines. In addition, both of these methods make it possible, in the first half of the service life of fixed assets, when they are most efficient and require the least repair expenditures, to allocate to renovation up to 75% of the balance-sheet value of the equipment.

In the USSR, in most branches of industry, understated depreciation rates exist; consequently, service lives are greatly extended. This applies especially to equipment which, thanks to the progress of technology and the growth of labor productivity, quickly becomes morally obsolete. If value obsolescence requires revaluation of fixed assets according to replacement cost, then constructive obsolescence leads to direct losses from the untimely introduction into operation of more productive and economical machines.

The actual depreciation rate in the coal industry over the last five years has been 4% per year. Of this, 2.9% went to major repairs and 1.1% to renovation. Proceeding from this renovation rate, the average service life of fixed assets should be 90 years, whereas in fact it does not exceed 40 years. As a result of low depreciation rates, industry suffers multibillion-ruble losses. For the period from 1951 to 1958, losses from this in the coal industry alone amounted to 6–7 billion rubles.

Questions of the longevity of means of labor, from both the technical and the economic sides, have been insufficiently developed. In confirmation of this, one may point to the following facts. In 1951 the State Bank of the USSR requested from a number of ministries information on the service lives of equipment and working machines. Analysis of the information submitted in 1951 to the State Bank of the USSR showed that the service lives for the same machines operating under identical conditions differ by 8–20 years.

In the economic literature and in production practice, in most cases the service life of machines is determined in years. It is economically more justified to determine the service life of machines in terms of the quantity of output they have produced, or in working time. When deciding whether further use of a given machine is expedient, the technical calculation should be linked with economic indicators. Operating expenses and the costs of maintaining the machine in working condition during the third period of its operation grow faster than output, since the machine stands idle for a considerable time because of frequent repairs. This should be taken into account when determining the optimal service life of machines.

From Fig. 1 it is evident that at first the annual costs of capital repair of the “Donbass-1” combine increase in proportion to output, but later, with the onset of progressive wear, the costs of maintaining the machine rise sharply, while productivity decreases.

Fig. 1. Determination of the optimal service life of the “Donbass-1” combine. 1—costs of capital repair as a function of the growth of extraction; 2—productivity of the “Donbass-1” combine; 3—economic efficiency of operation of the combine.

Curve 1 was obtained by summing the initial cost of the “Donbass-1” combine with the costs of capital repair. Curve of economic efficiency 3 was obtained by dividing the ordinates of curve 1 by the corresponding change in the machine’s output (curve 2). The intersection of curves 2 and 3 establishes the limit of the economically expedient service life of the machine.

The graphical calculation shows that, according to economic factors, the service life of the “Donbass-1” combine is determined by the extraction of 200–220 thousand tons of coal, or, at a planned productivity of 8 thousand tons per month, 2–2.5 years. The service life determined by us fully cor—

corresponds to the actual service life of the “Donbass-1” combine, although the theoretical service life of this machine is set at 7 years.

Thus, determining the optimal service life of a machine is connected with both technical and economic factors.

References

1. Pavlov P. M. Writing Off and Depreciation of Fixed Assets, Gosfinizdat, 1957.

2. Depreciation in USSR Industry (Collected articles under the general editorship of Candidate of Economic Sciences A. V. Bachurin), Gosfinizdat, 1956.

3. Bunich P. G. Depreciation of Fixed Assets in Industry. Gosfinizdat, 1957.

4. The Coal Industry of the USSR (for the 40th anniversary of the Great October Socialist Revolution). Ed. V. K. Buchnev et al. Ugletekhizdat, 1957.