Removal Costs Definition
Removal costs, defined as the costs of removing any physical material from the original location it was placed in, is an often forgotten cost. Despite this, it can have a huge effect on the finances of a company. Major manufacturing plants, businesses with fragile equipment, and multi-national corporations can see removal costs average higher than the entire yearly budget of some small businesses. Though seemingly unimportant, this plays an important role in the irregular fixed or variable costs of many companies.
Removal Cost Explanation
Removal cost, explained in varying importance and detail, remains part of the cost structure of many companies. There are 3 major factors of removal cost: labor, lease on equipment used for the removal job, and spoilage or damage to the material in transit. Removal costs can be a major line item or a minute cost depending on the type of business. The hadron collider, due to the massive and technical nature of equipment, must make a removal cost estimate and finish work by comparing this to the actual cost of the removal job. On the other hand, the local cosmetics boutique probably never thinks about the removal cost for mannequin and inventory. Still, each of these businesses experience removal costs. In a similar manner, oil companies see removal costs for their platforms in a different light. These businesses may even see these matters as important enough to enact a removal cost management system of it’s own.
Removal costs become more complicated in different environments. In a sterile and empty warehouse, removal costs would be at their minimum. In the very same warehouse, removal costs could skyrocket simply from filling the plant with inventory which then must be worked around. Under water, in mountainous regions, and other unique terrain removal costs play an important role. One day businesses could even deal with removal costs of items in space.
Removal cost Example
Kyle owns a large distribution warehouse for oilfield equipment. His warehouse has been running for quite a while and works on a tight operations schedule. Kyle, the founder and CEO of the plant, has faith in his decision making abilities.
Kyle has found a property which will serve as a more efficient warehouse. The facility is well maintained, closer to major transportation routes, and being sold at a discounted price. Kyle decides to make the switch and prepares his employees to move.
In this project, Kyle must move inventory, inventory storage and accounting equipment, offices, and more. He sees this as a minor setback to his operations which will pay off in the end.
Kyle and his team work diligently and are nearly completed with their move. Now, the only items left are the inventory storage racks. Kyle is just about to begin when his company CFO rushes out of the office to speak with him.
His CFO shares surprising news: moving these racks is a poor financial decision. Kyle, skeptical of this, wants to see the proof.
Liam, the CFO, shows his work. The removal cost of the inventory storage system will cost approximately $12,000 for a plant of this size. To put things in perspective, the racks have already become fully depreciated. Liam knows that the plant, even though it is being sold, will still need storage when the new tenant moves in.
Liam, through his contacts, was able to find an inventory storage system for $14,000. Though this is more expensive than the removal cost, the item will be shipped for free. On the other hand, Liam also knows the real estate market for warehouses. A new purchaser of the property will need an inventory storage system just as Kyle did. This, along with other benefits of this property, will be of persuasive value in selling the property. His calculation, based on expertise, places this negotiating power to increase total property value by $20,000. It seems many warehouse owners have the same concerns and hassle as Kyle when they decide to move.
Kyle remains skeptical until Liam completes his explanation. In a persuasive manner, Liam lays out the details of the plan. On the downside, Kyle’s plant could loose $2,000. On the upside, however, Kyle’s plant can make $20,000. Kyle decides to run with the plan that Liam has carefully formulated. Kyle is pleased with Liam’s work and will treat him to an expensive steak dinner for catching the mistake before it happened.