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COSTING AND ITS RELATIONSHIP TO RATES

STRUCTURE MR. ANDREW DUNN, THE fact that the first investigation of the National Board for Prices and Incomes was into road haulage rates has drawn a great deal of publicity to the industry. Some of the comments made by the Board were critical, and it is up to the industry to look at affairs to see if any of the comments were justified—and, if so, to do something about it.

It is my opinion, formed as a result of my own experience and from talking to friends in the haulage industry, that we have not kept pace with the rest of industry in adopting modern ideas in accounting or in the introduction of modern techniques in this field. By this, I mean that we tend to sit on our backsides looking at last year's figures through a microscope instead of looking out through the window with a telescope. Our habit has been to look at historical costs and apply them for the future on a rough and ready basis. Surely this will not do for the future.

The road haulage industry has a very large number of very small units and it may be asked if costing and rates structures have any relevance for them. The fact is that the principles are the same for all; but the practical difficulties of applying costing become greater as the unit becomes larger and more complex.

Perhaps there is not yet a sufficiently professional approach to management in haulage and this may be something to do with the size of unit, or unwillingness to pay for professional management. When transport operators get together, there is plenty of discussion about personalities in the trade, the difficulty in getting spare parts, the actions of the Licensing Authorities; but not much about new techniques. There is surely a need to be more

with it ", in modern parlance, with regard to new management ideas, such as work study, operational research, market research, network analysis and budgetary control.

In accounting generally, the emphasis is coming more and more on to the forward look and the development of management accounting. Less emphasis is being placed upon historical accounts. Conditions change so rapidly today that the emphasis must be on forward planning. Although historical accounts may be a basis for projection, new or likely changes must be forecast on the basis of present knowledge and plans and incorporated into the projection. Secondly. as businesses become larger, and this trend is evident in haulage, so more responsibility and authority has to be delegated. To ensure that the individuals to whom authority is delegated are achieving the results expected of them, forward planning of, costs and measurement of results against the plan are being used as methods of control.

The jute industry in Dundee was one of the first to provide comparative figures for its member firms and since that time the British Institute of Management has set up the Centre for Inter-Firm Comparisons. The figures are treated in confidence and an anonymous table is circulated to those taking part. It is very quickly evident where the weaknesses are in your own firm and a concentrated effort can be made to improve that particular facet of the business. This Centre has already done one exercise in the haulage field and the results produced have been quite stimulating.

There have been considerable improvements in efficiency in the road haulage industry over the years but this is going to be more difficult to achieve in future. There must be, among many of us, a change in our attitudes so that we are prepared to apply an open mind to new ideas. From the accounting and costing angle, we must use the information provided as much as a means to becoming cost conscious and improving our productivity as to using it for establishing rates.

Purpose and Principles of Costing To run a costing system will cost money and it must produce a benefit commensurate with the expenditure incurred upon it. To introduce a system must be regarded as an investment that is going to show an adequate return; but the system must not be more elaborate or costly than is absolutely necessary to achieve the object.

The advantages of a costing system are that profitable and unprofitable activities are shown up and action can be taken to improve or eliminate unprofitable activities and expand the profitable ones. The highlighting of individual items of cost makes it easier to see where waste is taking place and to enable corrective action to be taken. Provided that the allocations of expenditure are the same, it enables comparisons to be made either with forecast or previous periods or other firms. They also show up very quickly the cause of any decrease in profit.

Information is provided upon which a rate structure can be built or individual quotations can be made. One of the main features of such a system is that the disclosure of weaknesses in the operations stimulates the introduction of new and improved ideas.

All firms, however small, will produce a profit and loss account and a balance sheet. From the point of view of assisting in running a business there are two main snags about this form of accounting. The first is that they may not be produced for two or three months after the end of the trading year, and it could be that things have been going wrong for over a year before they are discovered, by which time it may be too late. The second snag is that they show only the financial results of the business as a whole. No detail is provided as to the manner in which

the profit or loss has been made. Some accountants produce figures that are more detailed and more helpful than others.

I have been very surprised indeed at some of the accounts I have seen of haulage businesses. Recently I saw the accounts of a haulage business which merely showed revenue, less operating expenses as one figure and gross profit. From the gross profit was deducted administrative charges, to arrive at net profit. These were the only figures this operator had, and they had taken a year to produce after the end of his trading year.

It may be a surprise to learn that affairs can still be run in this way. Needless to say, this operation had very poor results, and the operator did not appear to know what to Jo about it.

The first step must be to set up an accounts code which will give an adequate breakdown in the profit and loss account, and the second step is to ensure that they are produced at more frequent and regular intervals, not less

• than quarterly and preferably monthly. Speed of ---,presentation being, perhaps, more important than absolute accuracy.

Classification of Accounts The vehicle appears to be the only suitable cost centre for the haulier. Cost per ton-mile has been attempted as a unit of cost; but this has never proved very satisfactory as an overall measure, although it can be of use in specialized operations. If the total costs have been subdivided into running costs, direct standing costs and indirect standing costs, then the standing costs must be allocated over the fleet. Certain indirect costs, such as transhipment costs or any special services, may have to be treated as a service cost to special traffics. If this is the case, then they should be left out of the allocation to vehicles.

It is most important to remember that the allocation of standing costs must be over the operating fleet. It must be remembered that the whole fleet will not be operating all the time, because of maintenance, repairs, accidents, holidays, idle time due to fluctuations in trade, and so on. Over a year it will be possible to measure the percentage of such time off the road. If, for example, this comes to 20 pet cent of available time, then the standing costs must be spread over 80 per cent of the fleet to ensure that they are fully absorbed.

It does not appear to be general practice in road haulage to subdivide the standing charges between direct costs and indirect costs; but this can be a useful concept to assist in more realistic costing.

There are many detailed points about the treatment of different aspects of cost. For instance, should depreciation be treated as a standing charge or a running cost? There are elements of both. It can be argued that it is more realistic to treat depreciation on a mileage basis as the vehicle only wears out when it is running. On the other hand, parcels vehicles on low mileage on city work can be worn out at a far smaller mileage than the same type of vehicle in country areas. The main point is that depreciation should be fully provided for and, in my own personal view, the best means of achieving this is on a time basis, having calculated a realistic life for the vehicle (obviously taking into account whether it is single shifted or double shifted). Another example is the question of whether the cost of the original set of tyres should be deducted from the capital cost and charged as a running oi6 cost. This seems to be a rather unnecessary complicatior but is done by many of the experts.

As well as subdividing the accounts broadly between standing charges and running costs, it is also important to ensure that a further subdivision is made so that costs are clearly allocated to a particular department or section, or to individual depots.

Budgetary Control Budgetary control operations must be planned out in advance as far as possible and, if the planning is efficient, provision can be made for vehicles, labour, building and finance in good time. The effectiveness of budgetary control lies as much in its usefulness in controlling costs as in ascertaining them. The budgeted costs will be broken down into monthly figures and as soon after the end of the month as possible the actual figures will be compared with the ,budgeted figures. Where there is any significant difference, this must be investigated immediately, the reasons ascertained, and action taken to put the matter right.

Suppose that a haulier has been asked to set up a completely new depot to undertake all the transport requirements of a manufacturer, and he will be able to obtain the necessary A licences. He finds out that the output of the factory will be 10,000 tons per annum. What else will he need to find out? Such things as:

The cubic capacity of the product, and loadabilitY.

The tonnages broken down to the various destinations.

The fluctuations, if any, in the flow of traffic during the year.

Any limitations on the size of vehicle to be used.

Method of packing, the Length of time it will take to load and unload.

Is the traffic palletized?

Times at which loading and unloading can take place.

The possibility of obtaining backloads from the destination points and what percentage backloading can be relied on and at what rates.

The average speeds that his drivers can achieve over the various routes.

What transhipment is involved at intermediate points and sub-contracting required, if any.

Warehousing required,

From this information he will be able to decide on the number and type or types of vehicle he will require and the number of miles to be run, the size of depot and warehouse, the number of depot operatives, the clerical staff and so on.

Having done this, he is in a position to prepare an expenditure budget based upon the most efficient method he can plan to handle this traffic. In assessing all this, he will have established in his own mind certain standards. If he has been in the transport business for some time he will know these from his experience or he may employ a work study man to establish them. The kind of standards he requires to know are:—

Time taken per ton to load and unload.

Time taken per ton to tranship or cost per Ion.

Average miles per hour.

Overheads per vehicle.

Percentage of vehicles idle—maintenance, repairs, holidays, traffic flow. etc.

Percentage of empty running.

Average capacity utilized.

Percentage sub-contracted

He is also in a position_ to make out a financial budget showing the amount of capital he will require, including working capital and at what period he will require it.

Having prepared the budget, and the operation is going ahead, it is obviously essential that a strict control should be exercised over the actual expenditure incurred. The budget should be broken down into sections and the appropriate person in charge should be given the budget for his particular department or section.

They should have taken part in the preparation of the budget as they will then feel committed to it and be keen not to exceed it. Each department head should be informed that he is not to exceed his budget without authority. This is of great importance as, by this time, the rate will have been agreed and any increase in expen diture over the budget will result in a reduction in the planned profit. At the end of each accounting period, the actual results will be compared with the budget or forecast and any variances should be investigated immediately.

There is one further refinement in budgetary control which is worth mentioning and that is the use of flexible budgets for the variable costs. That is, if the tonnage does not come up to expectations and the mileage run drops, then the budgeted running cost figures should be varied accordingly.

It could happen that a haulier produces a carefully prepared budget on the basis of the rates he knows are obtainable and on costs which he feels are realistic, and yet his plans and the results seem to be sub-standard. How does he know where he is going wrong? The answer is that, having got so far, he probably does not know what he can do next. The subject of inter-firm comparisons was mentioned earlier and it is appropriate to look at it again now.

There is surety scope for the Road Haulage Association to undertake such work, especially for the benefit of the smaller units who have no basis of comparison. Alternatively the Association could sponsor, more strongly, development by the Centre for Inter-Firm Comparisons who are already experienced in this field generally, if not in haulage particularly.

It may be thought that no two firms are alike in their operations, but it would surely be possible to group firms in similar types of business for this purpose, much along the lines of the Association's functional groups.

As firms arc of very different size it is necessary to compare figures on the basis of ratios. This has the added advantage that it is virtually impossible to identify any of the firms in the comparative table.

There are a multitude of ratios that can be used; the following are a few that might be most appropriate:

Profit to capual employed.

Profit to revenue.

Revenue to capital employed.

Revenue per vehicle.

Revenue rer mile.

Mileage pet vehicle per week.

Running costs per mile—fuel, tyres, maintenance.

Various coil headings shown as h percentage of revenue.

Number of days' crecht.

Statistical figures can also be dealt with in a similar fashion, for instance:

xurnber of administrative staff per vehicle.

Average sice ot consignment.

Proportion ol vehicles not operating.

Percentage of capacity utilized—outward, backJoading.

It would appear that there is a great deal of scope for something along these lines that could be put into operation without getting too complicated or involving the haulier in too much figure work.

Since the vehicle appears to be the only satisfactory cost centre for a haulier, the costing we arc concerned with is the classification of expenditure which will enable the total cost of any particular vehicle to be ascertained with a reasonable degree of accuracy and to show how the cost is made up.

Budgetary control will indicate the area in which the trouble may be arising; but it does not indicate why it is arising. There may be many reasons for this, such as for example:

Rates timer than anticipated. • "tonnage may have been below expectations but the costs have not been reduced accordingly.

Capacity underutilized.

Percentage backloading less than anticipated.

bscessive sub-contracting.

Costing

The small haulier, with perhaps up to fifteen vehicles, will be constantly in touch on a. day-to-day basis with all his operations, and will probably be able to know from his own personal activities and observations what has gone wrong. As the company becomes bigger, however, this becomes more and more difficult for the chief executive of the company and he will require to have more assistance from control figures to show up the weaknesses.

It is suggested that the next stage in the development of costing would be to ascertain the profitability or otherwise of individual vehicles. This is not too difficult in most cases, and can be done on a daily or weekly basis depending upon the type of operation.

It is necessary to know the total number of hours the vehicle has been in operation. By applying the standing charges and running costs the total cost of the vehicle can be ascertained. From the consignment notes, the total revenue for the period is available and so the profit or loss on the vehicle for the period under review is available. If applied to the whole fleet this principle will narrow down the field for investigations to the sub-standard vehicle or vehicles.

Standard Costing

If it is necessary for management purposes to take a costing system further, then it is necessary to look at a more advanced technique that will show not only in what area things have gone wrong, but why. Such a system is standard costing.

Standard costing has been applied in most productive industries and found to be very beneficial. So far as can be found out very little has been done on the subject with reference to the professional haulier. It does seem that a considerable research effort is needed in this field because the trend to larger units is continuing all the time.

The starting point of standard costing must be tnanagement's assessment of what standards :are achievable. Information would have to be built up from an examination of each particular job. For instance, one customer may require a certain tonnage per year moved to a variety of destinations. It would need to be decided what types of vehicles would be required, how many of them and what mileage would be run. From his standing charges, and running costs already established, it is a straightforward matter to apply these to the individual vehicle selected for the job. This process would be gone through for each individual vehicle, and a profit margin added.

The type of information fed back to the management would depend upon the size of the organization. If it is a large organization then top management would probably only be interested in the first instance in summarized figures. The following are examples of some of the items that may be presented to him, each week or month:—

The standard revenue for the period and the actual revenue achieved. Standard and actual running costs for the period.

Standard standing charges for the period and actual charges absorbed by operations.

The standard and actual Prat.

The senior manager is now in a position of not only knowing his actual profit for the period, but also why it has varied from the standard set. The areas of particular importance are shown up and he can direct his attention to that aspect of the business immediately.

As standard revenue and costs have been allocated to vehicles, it is possible for the same information to be presented to junior managers in a detailed form based upon each vehicle or group of vehicles.

The aim should be for the standard costing system to ol7

allow management at all levels to measure their actual performance against predetermined standards. The kind of standards to be measured would be: Capacity; mileage; idle and waiting time; turn-round time; sub-contracting; price and usage of materials and labour; efficiency of labour; empty running; backloading.

My own experience is that something of this nature is needed, certainly in the larger units. There is nothing more frustrating than looking at a period trading account which may be sub-standard and being unsure of the reasons, or not knowing what the figures ought to have been.

Cost Structure From what has been said about budgets and standards, it should now be possible to build up a cost structure for any type of traffic movement. All movements will have some or all of the following elements in them: collection and transhipment costs; trunking and transhipment costs; delivery costs.

To try to produce a general cost structure that would readily show the cost of moving any weight of consignmentover any distance is not a realistic exercise. The difficulties arise because different sizes of vehicles will have different costs, backloading from some areas will be a different percentage from other areas. The position of the depots in relation to consignor's premises will affect collection costs and the distance relationship between places served will vary and affect costs.

It is therefore necessary to produce a cost structure for a particular type and size of vehicle operating from a particular depot. Even in this exercise it will be necessary to do a certain amount of averaging. This averaging should be within fairly narrow limits to make the cost structure as accurate as possible.

It should be possible to apply these principles to any vehicle on any type of operation to build up a cost structure. There are, however, many points to be watched. For instance, over short distances it will not be economic to obtain backloads; a decision will have to be taken as.to the mileage below which backloads will not be obtained and under these circumstances the total cost of the round trip will have to be applied to the traffic going one way. The same principle could apply to a very specialized vehicle over any distance.

• There is a great advantage in having a separate cost structure for each type of vehicle because it will enable the person in charge to see whether the going rate is economic or not for any particular type of vehicle.

Rates Structure It has been shown how a cost structure has been built up and it would be simple if we could just add a profit margin and call it the rates structure. This may be possible in the case of short distance operations or highly specialized ones; but when backloading comes in the situation is very different.

The average loading on the back journey might be less than with the originating journey. This will mean that the cost per ton will be higher with the back traffic. Obviously one cannot apply a higher rate for backloading than for originating traffic. Therefore, it is necessary to look at the round trip and find an average cost per ton and apply the profit margin. In fact, however, it may be found that rates for baCkloading, over which the operator may have no .control, are 10 per cent below what he would normally D18 require. He therefore has to load the rates on the originating traffic to balance the shortfall on the return traffic.

It is perhaps important at this point to try to establish how to decide upon the level of profit required. A number of factors must be taken into account. First, it should be sufficient to provide for the replacement of assets in so far as depreciation is insufficient. This is very important in the present inflationary age. Secondly, they should provide a reasonable contribution to expansion, by ploughing back. Thirdly, they should cover taxation on those items that are not allowable for tax purposes, and fourthly they should provide an adequate return to the shareholders.

We now have to face up to the world of reality where continued on page 79 going rates may be different. It is obviously necessary to be competitive; but the advantage of one's own rate structure built up on actual costs is that it will immediately indicate what particular traffic can be handled profitably. It also enables management to judge how far it is prepared to reduce from its rate structure without getting into the red.

Other factors can only be assessed by human judgment. The special features of a particular customer and his traffic may be quite significant. Rates have been built up on a standard volume to weight ratio; if the customer's goods -are particularly bulky, allowance must be made for this. It may be a particularly bad factory for delays; on the other hand it may be particularly good in that there are no delays and all traffic is palletized.

Deviations from the rate structure should only be allowed on management's authority because these deviations will affect the planned. profit.

If one wants to take the easy way out, it is not too diffi...alit to apply last year's costs and work out standing and running costs and apply them. Even easier still just to accept the going rate in the area. This surely is not a satisfactor approach in present changing circumstances.

An attempt has been made to consider the criticisms of the National Board for Prices and Incomes. The haulage industry has improved its efficiency over the years but there is some justification, perhaps, for what the Board had to say.

It is true that there cannot be a standard range of costs across the board in this industry and each type of operation and vehicle will have a different structure. On the other hand the Road Haulage Association can provide a service to members, first by drawing attention to particular cost increases and making suggestions if possible about how to overcome them and, secondly, by providing or stimulating some form of inter-firm comparison_

Discussion

AFTER congratulating Andrew Dunn on presenting what he described as a complex subject in masterly fashion, I. P. Young (BRS) asked whether he had considered the use of computer techniques to supply information for higher management in large organizations. He also wondered whether, in a large organization,comparisons between depots would prove Valuable. Mr. Dunn pointed out that such comparisons raised difficulties in that seldom were there like conditions. One had to be sure of not striving to attain. something at one depot simply because it had been achieved at another. It could be that similar results simply would not be possible elsewhere.

There was obviously a case for computer techniques, said Mr. Dunn. particularly in the work involved with consignments and also in the loading and routeing of vehicles. In ways such as this the computer could help management to manage.

Referring to rate structures, Mr. Dunn emphasized that it was most important for the operator to realize how much more expensive it was to handle a 2-ton consignment than a 12or I5-ton one.

N. Smith (Nelson Smith, Edinburgh)i said he wondered whether the theory of budgetary control when practised resulted too often in friction among staff. He suggested it could result in experienced transport men being told how to do their jobs by theorists, however expert the theorists might be. He also wondered whether Mr. Dunn felt there was an overall loss in efficiency in such cases.

Mr. Dunn agreed it was a problem, but if budgetary control failed then it illustrated a failure on the part of management. It was important to get across the reasons for such controls. There should be no loss of efficiency if everyone was made aware of what was being done and why.

Three questions were posed by R. P. C. Block (Blox Services): Should depreciation costs be based on mileage covered or the age of a vehicle? Should establishment costs be apportioned per capita or on a tonnage basis? Should a profit forecast be based on the yield one wanted on the capital involved or the percentage of profit that one looked for on the turnover?

Assessing Depreciation Mr. Dunn said he preferred the "straight line" method in assessing depreciation—that which related to the use made of a vehicle. It was important. that whatever basis was used it covered the full cost of the vehicle, with nothing left at the end of the vehicle's life. Costs, he recommended, should be apportioned on the capacity of the vehicle, as the loading capacity was generally the earning capacity. On the final question raised, Mr. Dunn felt that a profit forecast should be based on the capital employed in the business.

Depreciation was the subject of the next question. Mr. P. V. Connell (Alston's, Long Melford) inquired if, after an allowance of five years had been agreed for a vehicle and then it was decided to keep it for a further two or three years, one should then reduce the rate of depreciation or continue at the same depreciation with a hidden profit.

Mr. Dunn replied that the life of a vehicle had to be an estimate—one obviously did not know exactly what it would be. But one accepted a figure as a normal period. If at the end of that normal period one continued to operate it, he suggested that no further allowance for depreciation should be made. He suggested that the "hidden profit" might well be very difficult to realize and he recommended that the depreciation costs in these circumstances should be allowed to stand.

On the question of the cost of the initial set of tyres, Mr. F. M. Fieldhouse (British Ropes) pointed out that on a heavy vehicle these could amount to 15 per cent of the total cost and he asked Mr. Dunn to elaborate on the procedure he adopted in dealing with this problem. Mr. Dunn said that, whilst he would not be dogmatic as to the right way, his own view was that as tyres were part of the vehicle they should be dealt with, costing-wise, in the same manner as brake linings, clutch or gearbox.

Costing Artic Fleets Mr. F. L. Jolly (Ackworth Transport) pointed out that in contrast to the uncertainty of status of some C-licence operators, the A-licence man was very certain of his position. He had to be transport manager, production manager and sales manager rolled into one. He deprecated the advance of theorists into transport. The question he posed was whether in dealing with an articulated fleet all trailers should be dealt with separately or whether each tractive unit with one trailer should be treated as an entity and the balance of trailers treated as an overall cost.

Practice and theory were both necessary, Mr. Dunn replied. But it was essential to get the proportions right. The method of costing trailer operation undoubtedly presented a problem and he considered that it was largely dependent upon individual circumstances as to which of the two procedures were adopted.

Practical experience in cost comparison was given by Mr. W. McMillan (James Hemphill). He told delegates that his company had recently taken part in an Interfirm Comparison study after being introduced to them by the Road Haulage Association. It was essential first to get a group of similar companies and then to arrange a meeting to agree what information should be produced. Although they had only a relatively small office, he estimated the information had been obtained without undue dislocation of normal work for £1001 £200. Whilst the fee of Interfirm Comparison was a further £100, he considered this was the cheapest method of obtaining cost comparisons and they were continuing with the exercise. which_ haci.provided invaluable results.