Costing Must Be Practical
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EVEN where the need for an adequate system of vehicle costing is appreciated, many operators do not make full use of the results obtained, because the prime objective in setting up such a system has not been initially determined. Successful transport management depends substantially on practical experience and, correspondingly, on costing systems which, however theoretically accurate, tend to lose their purpose if they are allowed to become too, academic.
Similarly, it must be appreciated at the outset that it will be necessary to make estimates involving several variable factors. However wide an operator's experience may be there will always remain the need for subsequent amendment. Therefore, when considering the value of various methods it would be incorrect 0 adopt the attitude that there were only two—right and wrong. Obviously, records should be arithmetically correct, but the many varied branches of road transport can necessitate methods
which, although appropriate to the need, would superficially appear to be diametrically opposed to one another.
A case in point is the period .after which it is considered economic to replace vehicles. Even where two operators are engaged on journeys over similar routes and with vehicles of equal class, the wide difference in the urgency of the traffic they carry may justify totally different replacement policies. Consequently, all relevant aspects must be reviewed as widely as possible before determining the method of costing to be adopted. Otherwise, a substantial amount of useless paper work may be done.
A costing system must fulfil three requirements. It must be a measure of internal efficiency, and a guide to day-to-day management. Over a longer period it will determine the profitability, or otherwise, of the undertaking. Thirdly, and equally important, it must provide the basis for calculating charges to customers.
Most operators would find it impracticable to adopt a complicated method of calculating depreciation on the reducing value of each vehicle, if only because this would lead either to different charges when the same job was carried out by different vehicles, or the necessity to employ another method for calculating rates.
Despite the many variations in types of operation, and in the vehicles used, the two basic factors in commercial-vehicle costing—time and mileage—have a general application. Correspondingly, all expenditure which can be directly attributed a44 to the operation of individual vehicles is similarly divided into the two groups of standing costs and running costs.
Being based on the time element of transport operation, standing costs are shown as an annual, weekly or hourly cost. In contrast, running costs are calculated on mileage and are usually shown in terms of pence per mile. For the purpose of " ' The Commercial Motor' Tables of Operating Costs" these are calculated to the nearest two places of decimals, although it is recognized that, in some instances, even greater accuracy is required, particularly where annual fleet mileages are exceptionally high.
The method adopted in "The Tables" and in this series of articles is to divide standing costs into five items. These consist of: (1) Licences, (2) wages, (3) rent and rates, (4) insurance and (5) interest. All these expenses continue irrespective of whether the vehicle is operated or not.
Even though the annual cost of such items as licences and insurance may be known exactly, it is necessary to introduce an estimate when calculating the weekly cost. This is because, in the majority of cases, the vehicle is unlikely to be operated continuously for 52 weeks in the year. It is, therefore, necessary to ensure that the revenue obtained during the weeks when the vehicle is operating is adequate to cover the total yearly expenditure. Thus, the annual amounts are divided by 50, instead of 52, to allow for the period when the vehicle may be off the road either for major repair or on account of driver's holidays. The figure of 50 is considered to be a reasonable average which could be adjusted to individual operators' own needs. The item of licences is. largely made up of the duty payable under the Vehicles (Excise) Act, 1949, which is commonly, though now incorrectly, referred to as the Road Fund tax. In the case of goods vehicles, it is determined by the unladen
weight. As, however, the amount payable increases in accordance with successive additions of 5 cwt., it is sometimes (Continued on page 535)
possible that a vehicle with a higher carrying capacity—as distinct from unladen weight--could have the tame licence duty as the next smaller vehicle.
The appropriate proportion of carriers' licence fees also comes under this heading. The total fees .'payable and the: corresponding currency periods arc as follows:— A licence, .00, five years; B licence, 15, two years; C licence, LI 10s., five
years. .
In addition to duty payable as a hackney carriage; which varies according to the seating capacity, passenger operators also have to include under the cost of licences the fee payable for a certificate of fitness, which is valid for up to seven years and costs £5 10s. There is also the public service vehicle licence costing £6 and valid for a year. • Because Aand B-licence drivers' wages are controlled by law, their calculation for the purpose of costing is comparatively simple and standardized for hauliers. For C-licensees, too, the position is largely similar, because, •although there is no statutory obligation, wages paid by ancillary users tend to approximate to those of the professional haulier.
In calculating the cost of operating passenger vehicles, as shown in "The Tables," an average is --taken of the several national scales of wages payable to public service' vehicle drivers. Individual operators would. of course, use the appropriate scale for their own needs.
Include Under Wages
In addition to the basic wage rate. contributions made by the employer in respect of both national and voluntary employers' insurance should be included under the heading of "wages." Assuming two weeks' holiday with pay is granted, the total annual payment in 'respect of both wages and insurance contributions should be divided by 50, to obtain the weekly Cost in• respect of this item.
Relative to wages, it is' appropriate to exemplify the rival claims of practical application and strict accuracy when determining the method to be employed in costing. Many spheres of vehicle operation involve substantial overtime working. Where an estimate is required of a specific job in which both the time and mileage involved are known accurately beforehand, the precise cost of wages, including overtime, can be incorporated in the total cost and subsequent charge. But there are many instances where such information is either not available, or where it would be impracticable to differentiate between deliveries involving overtime and those completed during normal hours.
For example, where several deliveries are being effected
-during the day, their order iS probably scheduled for the operator's convenience rather than to meet the• customer's requirements. It is, .therefore, necessary to adopt some acceptable method of averaging.
-Assuming a standard 44-hour week applies, weekly standing cost (based on a 50-week year) will be divided by 44 to give an hourly cost. It follows that if rates are based on such costs, the revenue, obtained during the first 44 hours of operation should be adequate to meet all standing costs. Beyond that period, the only standing cost to continue is the item of wages. It is convenient to assume, for the sake of simplicity, that overtime payments would be balanced by the cessation of the four other items of standing costs.
. Overtime Difficulties
In devising standard rate schedules, different methods of dealing with overtime working would be difficult, if not impracticable. Any attempt to adopt a graded charge to take account of the higher cost of wages beyond 44 hours. would first necessitate determining what could be considered an average mileage to be accomplished during a standard 44-hour week. Equally difficult would then be the task of marrying " standard " additional mileages with increasing overtime. Even if this were achieved, the exercise would be of doubtful value, because the inevitable result would be that all customers would insist on their deliveries being carried out within standard hours, when the lower rates applied.
The item of rent and rates relates to the expense of garaging vehicles and, although a comparatively small proportion of the total operating cost, it should not be omitted. Insurance, in this instance, is concerned only with the premiums payable on the vehicle itself. The amount for individual' vehicles varies according to their total cost, capacity and location. Of recent years there have been substantial increases. in insurance rates, and especially in the effect which individual operators' records have on the amount of premiums they will have to pay.
The final item of standing cost is interest on the initial outlay on the vehicle. For the purpose of this series of articles, a nominal rate of 3 per cent. a year is assumed, although, here again, individual operators will vary this amount in accordance with their own experience. This particular item may, be largely instrumental in determining whether or not a trader or industrialist operates his own vehicles. Resulting from the large post-war expansion which has already taken place, it is often found that better use can be made of such capital in the main business-, rather than in purchasing, operating and maintaining an ancillary fleet of vehicles.