The need for costing
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LAST week the first of a series of three articles on costing the operation of commercial vehicles announced the imminent publication of the new annual edition of the Commercial Motor Tables of Operating Costs. This week the underlying principles on which these Tables are compiled will be examined. In turn this will facilitate explanation of how best to use and adapt the Tables to individual circumstances.
But first a few brief comments on the costing of commercial vehicle operation, and particularly its purpose and limitations. This is necessary to avoid the wrong concept of the value of costing being adopted from the outset.
A newcomer to costing, looking at a page of operating costs such as Table 5 of the new, 1969 edition reproduced overleaf might well consider that the columns of figures shown there represented an arithmetical type of exercise in which there was one answer—the right answer—and all others were wrong. Over the years this mental approach has been discernible in some of the queries raised by readers in interpreting the Tables.
Nothing could be further from the truth. Indeed, a major factor in the success of road transport has been its extreme flexibility to meet changes in both operational conditions and customers' demands_ Inevitably this invaluable asset of flexibility in the service provided is reflected in a wide vatiation in operating costs for what, on cursory examination, might seem similar types of operation.
The right approach Costing exercises, therefore, can be most usefully conducted if the emphasis is placed on ensuring that the records kept and the results obtained have positive value and are appropriate to the individual circumstances. After all, little practical benefit is likely to be obtained from academic discussions on the literal rights or wrongs of this or that costing system.
Road transport—whether goods or passenger—is composed of a high proportion of small firms, many with five vehicles or less. In other industries they would not even be reckoned as small: rather would they be termed minute. And within such a diverse and fragmented industry as road transport, the acceptance and application of costing to daily operation is unfortunately by no means universal.
That being so, one may well ask what is the purpose and value of costing. If many operators seemingly get by without troubling to keep records and costs, others may well question why they should bother.
The answer is in the key words "get by". Many small operators who continue in business without the benefit of a costing system worthy of the name fail to recognize the distinction between merely earning a living—and only by working long hours, at that—and running a profitable business.
Not viable In such situations the owner of a small transport business often only "gets by" through combining the job of manager, traffic clerk, fitter and possibly spare driver, for one pay packet with little left over for working capital, let alone future expansion.
Many such operators would be financially better off if they sold their business, invested the proceeds and took on paid employment. They would then almost certainly work less hours, have less responsibility and might even earn morel The crux of the matter is that until proper costing is undertaken they are not aware of their true position. So they continue, not only overworked and underpaid but as an undermining factor in the establishment of viable rate structures in their locality.
This, however, must be emphasized: no costing system, of itself, will make an unprofitable business profitable. What it will do is to provide the yardstick to show where the fault lies and provide a pointer to rectifying the shortcomings_ It may seem a far cry from the small transport operator to some of the most successful financial groups of recent years. But he can learn much from the reason for their success.
Their formula is simple: stop doing those parts of the business which do not pay, or do not pay enough relative to the capital and effort involved; transfer the capital_ and effort to the expansion of those parts which are profitable—or could be made so.
But to make the vital assessment of what is worth-while business and what is not, the availability of an up-to-date costing yard
stick is vital. Large groups invariably consider it essential to keep accurate records of the cost of operating the vehicles they run and the profitability of the traffic they carry.
Although a more modest costing exercise, it is essential that small transport firms do likewise if they are to get the best returns from the effort and capital provided. This will be even more necessary as basically own-account operators take advantage of the new legal freedom under the Transport Act 1968 to carry for hire or reward. Many such fleets have the backing of a costing department already established to service the main activity of their respective companies.
There is an additional reason why transport operation is in special need of costing, This is because it is a service industry. Neither its "raw materials" nor its "end products" are as readily, separately discernible as goods laid out on a factory floor or warehouse. Consequently crosssubsidization of "one journey" or "one flow of traffic" by another occurs more often in ttansport. Costing does, at least; ensure that it is not a hidden subsidy and that the profit and loss makers can be recognized for what they are.
An example So much for the need and purpose of costing. Now for an explanation of how the figures in the Tables are derived, with comment as to how they can be adopted to individual circumstances.
As an example, the figures used as the cost of operating the popular 12-ton artic will be used, i.e. the second column in Table 5 reproduced in this issue.
Time and mileage are two basic elements of transport operation. This fact is accordingly recognized in costing, by dividing all operating costs into two groups—standing ' costs, which have to be met whether a vehicle is operated or not, and running costs which occur relative to the mileage run. Both groups consist of five items each.
As shown in Table 5, (overleaf) the five items of standing costs are licences, wages, rent and rates, insurance and interest.
The amount (97s 9c1) shown in respect of licences for this 12-ton artic with platform trailer is derived from an estimated unladen weight for combined tractive unit and semi-trailer of 5 tons 7cwt. This incurs an annual excise licence duty of £216 which, with a slight addition for the carrier's licence fee, amounts to 79s 9d a week rounded to the nearest 3d and reckoned on a 45-working week year (or 225 working days based on a five-day week), as explained last week.
The wages shown represent a basic amount, while provision to add any additional amount is facilitated by the inclusion of a ready reckoner of weekly variations in the actual Tables of Operating Costs.
As a random example, if the driver in a particular case earned £5 a week more than the basic amount, the addition to the ultimate operating cost per mile would be 2.40d at 500 miles a week. At 800 miles it would be 1.50d.
Rent and rates in respect of garaging the vehicle are here assessed at the equivalent of 39s 9d a week and vehicle insurance at 93s 6d a week.
This latter amount is based on an annual premium of £210 12s. Like wages, this item can vary considerably—particularly according to individual operators' claims record. Here again the ready reckoner can be used by operators to adjust this item of cost, if necessary, more readily.
Interest charged on the capital outlay to obtain the vehicle has had to be increased to 10 per cent this year because of the increase in Bank Rate. The cost of this 12-ton artic is estimated to be £3,045, giving an annual interest charge of £304 lOs or 135s 3d a week.
Weekly total These five items give a total standing cost of 693s 6d per week. But running costs are reckoned per mile. So, before standing costs and running costs can be added together to give an operating cost, the weekly mileage has either to be known or, in the case of an estimate for a quotation, an average weekly mileage has to be accepted.
Dealing with running costs, fuel is the major item. Based on a dery price per gallon of 6s 0,+cl and an mpg of 11, a fuel cost per mile of 6.57d is obtained.
Because it is such a major item. a Cost of Fuel ready reckoner is also provided in the Tables to facilitate adjustment of this large item of costs to meet individual circumstances. Thus if an operator bought fuel at 5s I Id a gallon but only averaged 10 mpg, the ready reckoner shows that the fuel cost would then be 7.10d, an addition of 0.53d a mile.
Lubricants are estimated to cost 0.33d and tyres 2.54d a mile, assuming a mileage life per set of 30,000.
As explained last week, maintenance costs have been substantially affected by the implementation of more stringent regulations governing vehicle fitness. For this 12ton artic the cost is now reckoned to be 4.07d a mile.
Depreciation cost is obtained by first deducting the equivalent cost of the original set of tyres from the cost of the artic (£3.045) and a reduced residual value of 5 per cent. On the basis of a mileage life of 150.000 miles for the tractive unit the depreciation cost per mile of 3.41d is obtained.
The resulting total running cost per mile is therefore 16.92d. At 800 miles a week this gives a total operating cost of 27.32d a mile or £91 Is a week, as shown in Table 5.
Next week, we will take a look at a method of building up cost records which can be adopted by any operator.