To Compare Costs of Individual Operators is Dangerous, Because There is No Unanimity of View on Essential items.
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Can Removers Reach Unity
on COSTS?
WHEN I read, in the advance notices of the autumnal conference of the National Association of Furniture Warehousemen and Removers, that there were to be two papers dealing with some aspects of costing, I was naturally very interested. Both the authors are friends of mine and to my knowledge were well acquainted with their subjects.
Mr. E. G. Wright, of Leicester. entitled his paper " Prime Costs." Mr. W. E. Blatchford, of Exeter, dealt with "The Importance of Accurate Costing of Establishment. Administrative and Overhead Charges."
The papers and the discussion were reported in "The Commercial Motor" dated November 5, and there is, therefore, no need for me to deal with them in detail in this article. As was reported and as I shall stress, the paper by Mr. Wright provided a surprise and that of Mr. Blatchford contained a particularly sensible suggestion.
Danger of Comparison
I have always emphasized the danger of comparing the :osts of one operator with those of another or with any specific schedule of average costs such as "The Commercial Motor" Tables of Operating Costs, and as the surprise item in Mr. Wright's Paper emphasizes the importance of that policy, I propose to dwell on the point briefly before I come to my main theme.
I have given similar advice to vehicle manufacturers when they have suggested to me that one way of selling their vehicles is to dwell particularly on the aspect of cost, the manufacturer himself having sufficient faith in his product to believe that his operating cost would be below the average. I give it myself regularly when lecturing on costs.
The reason why such comparisons should be avoided is that there is no certainty that one operator's method of costing is the same at that of another or that the operator's system is the same as that of the manufacturer or salesman who is proposing to compare operating costs.
In certain circumstances, as when there is comparison being made between different types of vehicle, such as petrol and oil-engined machines, I recommend the use of "The Commercial Motor" Tables of Operating Costs as being suitable. They are unbiased and authentic: they can safely be used as a standard of comparison It is not, however, practicable to use even the Tables when checking up an inquirer's costs and that for the reason al ready given.
Recently, the representative of a well-known manufacturer of commercial vehicles telephoned and asked me what I thought should he the maintenance cost of a particular size of vehicle in which he was interested. I told him that I would not like to give him an estimate unless I was given some information as to what was in his mind when he thought of maintenance costs.
I pointed out that in "The Commercial Motor" Tables of Operating Costs there are two items of maintenance, designated maintenance (d) and maintenance (e). I told him that maintenance (d) covered periodic attentions such as greasing and oiling, washing and polishing and, a more long-term" item, the revamishing and repainting of the bodywork, which was assumed to take place irrespective of mileage.
The term maintenance (e) covered those attentions needed as the result of wear and tear and were thus to be calculated on the basis of miles run. After a discussion it seemed advisable to compromise between those two and add a little of maintenance (d) to maintenance (e) in order to give him the figure he required. The reason for that difference was that he wished to include this revarnishing and repainting in his estimate of maintenance costs and on that I was able to give him a figure which satisfied his requirements.
Incomplete Costs
Mr. E. G. Wright's paper, as was disclosed during discussion, gave particular emphasis to this danger of accepting operators' figures and putting them forward as representative cost data. It did transpire, during the discussion, that Mr. Wright's figures (they were, by request, omitted from the report of the paper), were based on a collection of schedules of actual cost submitted to the costing committee of the association for the purpose of compiling tM equivalent of furniture removers' operating-cost tables.
Mr. Wright used them as they were and, as a result, was led into the serious error disclosed during the discussion, that he put forward as operating costs, amounts in which there was provision neither for depreciation nor interest on capital outlay.
It appears that those members of the association who disclosed their costs were in the habit of entering only tangible costs, i.e., actual direct expenditure on licences, insurance, fuel, oil. tyres and maintenance. Depreciation and interest were not, therefore, recorded as costs. They were listed as theoretical and for that reason omitted. A statement was made during the discussion that these two items were included in establishment costs, but I myself have some doubt as to that, as Mr. Blatchford, who dealt fully with establishment costs, made no reference either to depreciation or interest in his schedule of items that come under that heading. As a result it must be that the operating cost plus establishment cost figures, thus collated, are below the actual amounts. The significant point about this error is that it indicates that most removers who keep costs are still in that deplorable state of believing that their costs are represented by their actual "put-Of-pockets," omitting and probably forgetting that interest and depreciation are just as important. That, of course, was for many years a common error among hauliers, and probably still is, with many. It has the unfortunate result of encouraging unintentional rate-cutting
I have stated that Mr. Blatchford was obviously unaware that there was any idea that depreciation and interest should be included. In proof, here is his list of the principal items of overhead expense:—salaries (management and clerical), insurance contributions, holidays with pay, directors' fees, office rent and rates, telephones, advertising, printing and stationery, travelling expenses, including car, postages, light and heat, association contributions, auditor's and legal expenses, claims, bad debts, sundry insurances, office decorations, and depreciation.
I do not agree that that is a complete list and, of course, it was not put forward as such. Nor do I accept the item " holidays with pay" as being an overhead. I recommend always that there should be provision for that expenditure in drivers' wages. The point, however, is not particularly important. What is essential, of course, is that there must be some provision for that expenditure.
Uniform Costing System Required
The outstanding point made in Mr. Blatehford's address. the one upon which he is most sincerely to be congratulated, is that he put forward a suggestion which, if it were to be carried out, would make it impossible for such errors to occur. He said that in his view it would be in the best interests of the trade if all the areas of the association were to discuss the possibility of devising and adopting a uniform system of costing. The result of that would be that they would reach a reasonable and satisfactory alignment of cost, What I propose to do is to indicate, first, the essential conditions for the compilation of a uniform system. then. secondly, to develop the subject by giving some practical examples, and, thirdly, to endeavour to apply those conditions and practical examples in a way which will align the proposed system of costing with the recommendations which the association makes to its members, in a booklet in which it suggests ways and means for estimating for furniture removal.
The primary purpose of this uniform system of cost recording is to serve as a basis for estimating charges for furniture removal The remover desires the information so that he may use the summary of the costs recorded to quote for a job and to be sure, first, that he is covering all his expenditure, and, secondly, that he will make a profit.
It is a peculiarity of the operating costs of commercial vehicles, and to a less extent of establishment costs, that some time must elapse from the installation of a recording system before useful figures will be available.
Early Experience Misleading
Take, for example, the case where this method of costing is being applied to a new vehicle. There will, for quite a time, be very little spent on the vehicle other than on petrol and oil and the weekly wash, polish, greasing and oiling. There will presumably be no expenditure on the more -important items of maintenance such as decarbonizing, brake refacing, engine overhaul, chassis overhaul, body repairs, repainting and re-lettering.
Moreover, it will be quite a long time before the really expensive items in the list occur. With establishment costs, too, it is usually at least a year before the operator will arrive at a total which is sufficiently accurate to serve as a basis for estimates of charges.
On the other hand, the operator cannot wait for that. He wants to put in a quotation in the first week and therefore provision must be made in this uniform system of costing to enable him to know at once what his costs are likely to be, so that he can use those figures until sufficient time has elapsed to enable him to compile a schedule of costs as they are.
In other words, he roust for some time rely on estimates for some of the items—maintenance and tyres in particular— as he cannot obtain accurate data.
At the same time, whilst in the beginning estimated or budgeted figures must be used, he must nevertheless so 1110 arrange his records of costs that he is all the time .com piling actual data and at the end of a period can use the actual cost figures or, as is sometimes better, modify his estimated figures in accordance with his experience.
The next essential of this uniform system is simplicity. The recording must be easy and not involve too much clerical work. The records must also be simple to inteipret, so that the object of providing a basis for quotations can be attained. The summaries of cost of operation and of the establishment costs must be such as to enable them to be used easily.
This need for simplicity, however, important as it undoubtedly is, must not obviate another need of equal importance—that the records of costs are complete and comprehensive. There must be no chance that certain items of expense are omitted or not fully entered. If that were to occur, the prime object would be immediately defeated, as the apparent cost would be less than the actual cost and the operator would not be able to ensure a profit on his undertakings.
Separate Costs for Each Vehicle
Further, in order that the cost records may be as use' ful as possible to the operator and to the association in general, each vehicle must be separately costed.
The vehicle costs in themselves must be self-contained and complete, embodying only such items of expenditure as must be properly debited to the vehicle operating and exclusive of any establishment or overhead cost, as well as any additional tabour charges.
Here I will again refer to "The Commercial Motor" Tables of Operating Costs, because a brief study of them and of the method of their compilation indicates the best method of ensuring this condition. In each of the tables, there are 10 items of cost enumerated. They are all that are involved in operating a commercial vehicle, consisting of:—fuel, oil. tyres, maintenance, depreciation, wages, Road Fund Tax, vehicle insurance, garage rent, and interest on capital outlay.
It may be found preferable to depart in one way from the principle laid down in those tables, namely, that depreciation is included as a running cost. I have accepted in principle that a method of uniform costing suitable for application to the business of furniture removing and warehousing should, as far as possible, be aligned with the method already sponsored by the association in its own publication, in which depreciation is regarded as a standing charge.
Ten Principle Items When! say that' there are 10 items I mean that these are principal items. It will be found convenient to sub-divide some of them, as, for example, maintenance, which for the purpose of actual cost-recording,, is better entered under the two headings of materials and labour.
Any expense which cannot clearly be entered under one of these 10 items is not an item of vehicle operating cost. it has to be debited under overheads or establishment costs, administrative costs, and so on, and in any system of cost recording which is likely to succeed, that segregation of vehicle costs on the one hand and establishment costs on the other, must exist.
In this, I do admittedly depart to some extent from the procedure set down by the association, inasmuch as it includes some administrative expenses under vehicle costs. I am of opinion that that is dangerous and liable to lead to misconception. Moreover, it is of interest to recall that, according to what was stated during the conference, many operators take the opposite view and have transferred depreciation of the vehicle and interest on the capital outlay to their administrative charges, which is most emphatically wrong. S.T.R.