The Value of Cost Recording
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"One of the Reasons for Reluctance to Keep Accurate Cost Recordings is the Seeming Complication," says "The Commercial Motor" Costs Expert, Who Shows how an Operator may Usefully Apply Knowledge so Gained
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THE growing cost of hired haulage, whether it is on an A or B licence or a C-hiring margin, and whether the operator be a private enterprise haulier or the Road Haulage Executive, is causing many traders to take an active interest in costs of operation so as to be able to detect any attempt by contractors to make unreasonable charges. I gather from conversations that motor dealers have also noted the same tendency. Prospective customers are now in the habit of demanding information about costing. in greater detail and with more accuracy than has hitherto seemed necessary. It is the C-licensee who is becoming keen to know what his transport should cost, especially when he is considering operating his own vehicles for the first time.
Before the war, it was notorious that most C-licensees knew nothing about operating costs and were not particularly interested in the subject. Some of them entered any expenditure on transport as a separate item in their books, but even they were in the minority. Extremely few kept track. of transport expenditure week by week so that they could aseertain the causes of increasing costs..
Where only one vehitte is concerned, theprocedure -of entering items relating to transport separately and without analysing them is sufficient, especially if the cost...b6 checked at regular intervals. Where more than one vehicle is in use, I consider that this empirical method of keeping records of cost of transport is wrong. Actually, however; there are many vehicle users, some of them fleet owners,who would be entirely unable to pick out the cost of their transport from their, accounts, let alone be able to differentiate among the performances of various vehicles.
. Costing Items Separately There are many reasons why it is advisable to keep track not only of the costs of each vehicle in a fleet, but also of the separate items of expenditure. There is, for example, a difference in the costs of running various makes of vehicle.. So real is this difference that users who have gone to the trouble of compiling accurate records of cost, have found it worthwhile to dispense with certain vehicles and buy other types to effect savings. It has also been found that it is usually much more economical in the long run to standardize. upon a particular make. As might be expected, the Cost of maintenance is a big factor; the rate of depreciation is another, whilst tyre manufacturers are insistent that -gime makes of commercial vehicle are much harder on tyres than others.
Here is a case in point. A C-licensee owning a fairly large fleet used one make of vehicle rather high in first cost. A decision was made to change in favour of another make. because it was hoped that an economy would be effected. The first cost of this alternative type of vehicle was £200 less. Experience with the older machines had led the operator to take eight years as the life of a machine. It was considered. therefore, that by cutting the initial cost by £200 it would be possible to save £25 a year per vehicle in depreciation and a further £6 per year in interest on first cost. This operator, like many others, kept accounts of his transport department as a whale with no records of the performances of individual vehicles. The maker of the more expensive type of machine, being naturally concerned at the loss of custom, was confident that by accurate accountancy he would be able to show that his was the more economical proposition notwithstanding the higher price. He was able to persuade this user to keep individual reeyrds of cost and after a time he was able to show that the high-priced machine saved 2d. per mile over a reasonable period compared with the cheaper vehicle,
B16 The average mileage of each vehicle in, the fleet was 12,000 per annum, so that 2d. per mile represented a saving of £100 per year. Setting this against a saving of 01 per year arising from the lower first cost of the cheaper vehicle, a net advantage of £69 per annum was shown in favour of the more expensive machine.
As , the manufacturer of the more expensive machine pointed out, there was more in the matter than that, as there was also the saving because the low-priced vehicle was off the road for maintenance and repair more frequently and for longer periods than the other_
Had this user not been persuaded to keep records of individual machines. he might never have discovered how much better it was to buy a more expensive vehicle. In the long run, perhaps, the point would have come home because he would have found that the cost of his transport was greater than with the other more expensive machines. The point is, however, that he would not have come to this conelusion until practically the whole of his fleet comprised low. priced-rsti.ieles, whert,it would have taken .a long time to go
. back terjhelmore expensive lorries.
Lack of Appreciation
One of the reasons for reluctance to keep accurate cost recordings is the seeming complication. There is a lack of appreciation of the number of items which is involved, largely because whilst some of them are of frequent occurrence, others may not recur for periods of a year or more. I dwelt upon this matter at some length in the previous article when I pointed out how important it was to reckon depreciation on the purchase price of new vehicles, but the point Is sufficiently important to justify further reference. The' following notes arc intended to help the newcomer to cost recording to visualize just what is wanted.
In the first place, it is necessary that each vehicle be treated, so far as possible, on its own, and the first thing to do is to compile a separate register for each lorry embodying all such information necessary to identify it.This is not only for purposes of cost recording, but for such things as the completion of application forms for licences, communications with the manufacturer, drawing out insurances and making insurance claims.
The next thing 'to do is to make note of those fairly heavy items of expenditure which recur at long intervals, such as the renewal of insurance premiums and theannual licence. There should be included with them the interest on first cost and the rent and rates of the garage in which the vehicle is housed. (If several vehicles be kept in the one building it will be necessary to allocate a proportion of the rent and rates to each machine.) . These four items, together with the wages of the driver, comprise what are called standing charges. They.are the items of expense which do not vary with the weekly mileage. In order that the total cost of operation of the vehicle may be known fairly closely and as soon as possible after it is put into commission, it is.advisable to set these records out in such a way that their incidence as weekly charges can immediately be appreciated..
One One of the items which it is difficult to record is the cost of tyres. The compilation of this information has possibilities of usefulness intwo ways. It is essentiaVas an item of operating cost, busconsidered in that tight alone-it would be sufficient merely to enter the expenditure-on new tyres and repairs to old tyres, There is a further possible object, however. The user may desire to compare the-performance of different makes of tyre and if he wants that information he will have to compile a
tyre register For each tyre he will have to enter the date fitted and the make, the wheels to which the tyre was fitted, when it was removed and refitted, its cost, the date when scrapped and the mileage it had covered. There will also have to be a separate tyre register for each vehicle on which to record the tyres fitted at any one time.
One special item which must appear on the register of the vehicle is depreciation. This must be calculated as an amount per mile run so that it can be treated as an item of running cost. It can be assessed, as I have so often described in these articles, by subtracting the cost of a set of tyres and an estimate of the residual value from the initial cost of the vehicle, and divining the result by the assumed mileage' life. That figure, the depreciation per mile, should be recorded on the register and then used each week to calculate the depreciation according to the distance run. That is only one way of assessing depreciation. The reader may desire to make use of one of the other two principal methods. The first of these is that in which depreciation is based on time rather than mileage. This is to be preferred when the annual mileage is low, say 10,000-12,000 miles per annum. The procedure will be similar; the operator should first subtract the cost of a set of tyres from the initial cost of the vehicle and then the residual value, as above explained. Then he divides by the 'number of years as the period for which he hopes the vehicles will perform satisfactorily
Combining Time and Mileage
The third method is one which I have been using fairly regularly of late: it combines time and mileage. The initial procedure is the same, but after that there is a difference. 1 he result must be divided into two equal parts. One part must be divided according to the number of years the operator expects the vehicle to be in use; the other half must be divided by the number of miles he expects the vehicle to run. He will, as the result, have two figures for depreciation, one based on time, which he will put amongst the standing charges, the other based on mileage, which he will put amongst the running costs. To keep track of current expenditure, the driver's log is one of the most useful aids. As a rule, the driver's book embodies information as to the amount of petrol used by each vehicle and its cost, also the amount and cost of the lubricants. The information regarding these two items should be transferred to the records. as well as any expenditure on central stores.
At the end of the week, this expenditure should be totalled and summarized. The weekly charges (including 'depreciation) should be taken from the register of standing charges and added, as well as an estimated proportion of time cost and any weekly charges. By dividing the mileage covered into that figure, the cost per mile will be indicated. This method has been set out in greater detail than is possible here in a publication entitled "Costs Recording Made Easy," which can be obtained from Temple Press Ltd.. Bowling Green Lane. London, E.C.1, price 2s. 2d. per copy postage included (This book also embodies a description of a basic system of fleet maintenance.)
Having obtained information about actual costs, the nest thing to do is to consider how to make the most use of the knowledge„ In the first place, as I have pointed out, it can be employed for differentiating among the costs of .running different vehicles. It is also valuable because any change in casts can be immediately noted and any .unnecessary Waste detected. It also acts, to -a Certain extent, as a check upon the efficiency of the various' drivers. In interpreting the figures, it must be remembered that the way the vehicle is driven can have an enormous effect upon its cost of operation.
Inevitable Differences
As to the use of the figures by the C-licensee, differences must inevitably arise according to the business upon which he is engaged and the nature of the goods. The operator who is chiefly concerned with the cartage of road material. bricks, coal and loads of that kind, will find an estimate of the cost ot operation fairly easy. He will naturally keep a record of the number of loads and the distances. The cost of running tile vehicle for a week divided by the number of fully loaded miles will give him the figure for the cost of each load.
The user whose goods are to be put in small parcels will, if those parcels be of the same size, be just as happily placed in ascertaining the cost per parcel. He will need to find only the cost of each load and divide that figure by the number of parcels per load to discover how much it costs to deliver each parcel.
Where The parcels vary in size, the problem is more complicated. Its solutiin starts 'as before—by finding the cost per load and then the cost per parcel. After that, a certain amount of differentiation between one parcel and another, according to size, is necessary'. That is a problem which I must leave trail another time.
I have stressed the aspect of cost recording, Which most concerns the C-licensee in this article. The haulage contractor, however, is equally concerned inasmuch that his vehicle is the machinery of his business and his service is the carriage of someone else's ,goods. He must always realize that the figures described above comprise the cost price of the commodity which he is selling, namely, the use of his vehicle. To that he must add overhead costs (expenses for carrying on his business); selling costs (any expenses he may incur in advertising and otherwise obtaining business), and profits. Only when he has considered all these four items he arrive at a reasonably profitable contract price. S.T.R.