Hi,

I was wondering, when you say "allocated to cost centers" what ar you referring to or doing?  Posting to jobs?

Thanks,

With most of our equipment, we post the equipment cost (depreciation, insurance, repairs, etc.) to an overhead department, which is allocated to cost centers each month.  As equipment is actually used, we charge individual jobs rent, and this offsets the total expense that sits in the overhead department.  When equipment is idle, the overhead is higher.  We do not punish the individual jobs for the sake of managment decisions to carry the equipment. 

We definitely review assets that are idled too long.

Project managers do not typically make equipment investment decisions. Those decisions are usually made by executive or senior management. Investment is promulgated based on market, demand, and production/installation scales of efficiency. In other words, each piece of equipment is purchased and evaluated (or at least should be) based on its projected return on investment. What does the project have to do with any of these concepts other than being the source of work and payment for the equipment?

To handcuff each of your performing projects with underperforming assets will ultimately lead to poor pricing decisions for your firm in the future. In other words, based upon your allocations you could be putting yourself out of business in the future!

Recognize what it is at this point in time - an investment that is not producing returns. Think of it as an underperforming stock/equity investment. You have several strategies to consider:

1. SELL - Dump it and salvage whatever cash you can out of it. This probably means taking a loss in the current period. If you have income in previous periods and are not an S Corporation, there may be carrybacks and thus found $$$ from previous tax returns.
2. HOLD - Keep it on the books. Ride out the bad economy, and wait for things to improve. This may not be realistic if there is debt service involved.
3. BUY - Given your question and current strategy, this is highly unlikely, but recognize that someone is invoking this strategy in this economy. There are those that will profit as a result of someone else's loss.

At any rate, I would sell the equipment and move on. Better to take your lumps now than strangle your business model going forward. If management wants you to bury this costs in the other projects, you should point out the pitfalls this decision may create. If you are going to keep the equipment, then I would show the cost as part of G&A (as a separate line item) so it does not impact your gross margin.