Operating Cost

There are two good reasons why a clearly defined agreement on accounting procedures is reached between the owners and the managers.  First, is the obvious fact that the owners are not only entrusting to someone else the management of capital assets probably worth tens of millions of dollars but also allowing that third party to commit significant sums of money daily in the running of the ships. Secondly, the shipowners need to know whether or not the sort of business in which the ships are engaging is covering costs – preferably of course making a profit.  Whenever a new piece of business is being contemplated the commercial department makes a voyage estimate.  Which as the name implies is an estimate of the financial outcome of the voyage(s) or period being considered.  To make this estimate three cost areas have to be combined.  The first are the fixed costs which are those that occur whatever the ship is doing, whether it is sailing on a voyage, working in port or simply laying idle waiting for some business.  A major item here would be amortisation (or depreciation) which is the term used to cover the need during the working life of the ship gradually to write off the initial cost of the ship.  Very frequently a ship is paid for with money borrowed from a bank or other financial institution and the cost of the instalments repaying the loan plus the interest charged by the lender is also essentially a fixed cost. Then there are operating costs which are only incurred if the ship is active but have to be paid whether the ship is earning money or not; crews’ wages is a typical operating cost. Fixed costs and operating costs are provided to the commercial people by the managers so that they have to be able to supply very accurate budgets of all anticipated expenses which they, or the owners themselves, break down to a cost per day.