Costs and Profits at a Glance
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Solving the Problems. of the Carrier
• Supplementing a Recent Series of Articles Entitled ." An Operating Costs Records Quiz" in which a Cost-recording System was Fully Discussed •
MANY readers will recall my series of articles entitled " An Operating Costs Records Quiz," It commenced , in the issue of " The Commercial Motor " dated September 25 last year and ran until the issue dated November 6. It related the details of an interview with a young. costs accountant who had recently taken a new position with a large concern of haulage contractors.
Although he had some knowledge of costs accounting, as conducted in other businesses, it was his first experience of the haulage industry. His employer, appreciating that methods of a particular nature were desirable in connectioe with his business, reconunended him, first, to study " The Commercial Motor" Tables of Operating Costs and, secondly, to get into touch with me.
In that series of articles, the basic principles of costs recording, as applied to a large fleet, were dealt with in detail. Reasons were given for every recommendation which I made to this accountant and provision was made for every contingency likely to arise. ' Amongst other things, the importance of providing for the recording of estimated costs of expenditure on tyres, maintenance and depreciation was stressed and a method of correcting those estimated costs from time to time, to bring them in line with actual expenditure, was laid down.
Establishment costs, also, were dealt with at length and an explanation of the reason why such costs are allocated to the various vehicles in proportion to the pay-load was , given. The articles terminated with the description of a method of recording tyre changes, from which the actual cost of tyres per vehicle could be accurately assessed.
Essential Details of Monthly Summary Quite recently, after a lapse of nearly six s months, this accountant again called to see me; he was very pleased with bimseff. He had put the methods I had recommended into operation with success. His directors were perfectly satisfied, so much so that they had now reached the point when they felt it was not necessary for them to examine each costs sheet in detail. That this was a task of some magnitude will be appreciated by those readers who recall that the fleet comprised 67 vehicles, that there was a costs-record sheet for each vehicle, and that on each sheet were 33 separate items.
What they now wanted, as my young friend informed me, was some sort of summary, made out for preference at monthly intervals, which would give them the essential information as regards costs, revenue and profit, not so briefly that they would lose sight of, or be unable to determine, any tendency of expenses on any particular item to
rise, but not so extensive as to involve the expenditure of much time on their part in examining the records. My advice was requested as a supplement to that which I had previously given.
"Have you thought about the subject at all? " I asked, " Yes," he replied " I had the idea, at first, that all that would be necessary would be a brief monthly state ment as to the tOtal expenditure and the total revenue. I
submitted such a monthly statement, but that does not give all the information the directors need. They want some
details as to how the money is being spent, but were not very explicit as to the extent they required me to go into the matter. .
" I did think that the most straightforward way would be to make up an analysis sheet having the same number of columns as the cost-retord sheet and submit, as a monthly summary, the grand total of the expenditure, profit and/or loss, for each month. I feel that that will probably give more detail than they require, and I thought before I ran the risk of having a second suggestion turned down I would come to you for guidance."
" You did well," I said, " for there are two major defects in your plan. In the first place, it is quite unnecessary to give information in a monthly summary under all the 33 headings which you have on your costs-records sheets. In the second place, it is a mistake to take the totals for a fleet, which, if I remember rightly, comprised over 60 vehicles of different load capacities. Do you mind refreshing. my memory as to the composition of the fleet? "
" Not at all," he replied. "There are 43 10-tonners, seven 12-tonners, five 15-tonners, 10 6-tonners and two 2-tonners."
" Now, if you think for a moment you will, I am sure, appreciate that to put into one total the operating costs of a fleet of vehicles comprising so many different load capacities would not serve, a useful purpose. If, for example, the profit in any month showed a considerable. drop drop it would be essential to know whether that falling off arose in connection with the biggest vehicles or the smallest. Morebver, as we shall see when we do this little job in the way I shall recommend, differences in cost per ton and per mile as between heavy and light vehicles are so great as to he irreconcilable, thus making it illogical to lump them all together." .
" You think that I should segregate the various sizes .then, do you? " he asked, Simplifying the Analysis Sheet " Emphatically," I replied, " but first of all let, us look into the question of the headings which you should have on your analysis sheet so that we can reduce those 33 items and make the summary somewhat less cumbersome. Take fuel, which in the costs-record sheet takes up five
columns, and oil which needs another five. Of each of those two sets of five one only is needed for your summary —that of cost,
" Moreover, it is improbable that your directors will be much concerned with the expenditure on lubricating oil, which is not likely to 'exceed £1 per month per vehicle.
I suggest, therefore, that you have one column only to replace those 10, that column being headed Fuel and Oil.' "Similarly, tyres and maintenance can be taken together, which replaces six columns by one. Wages, including National Insurance contributions and so on, calls for four columns in the costs-record sheet, but one will suffice."
"You are certainly making a big cut in the number of items," he said, " but do you think that there will be sufficient detail for my chiefs if I reduce them in that way? "
" I am sure of it," I answered, "and I am going to suggest that you prepare your summary along the lines of
a specimen I have here, which I suggested some time ago to another friend of mine. It has been shown to be quite satisfactory, having in mind the end in view.
" In the first column, of course, there is the date, then, after vehicle details, comes, in column four, wages, including insurances, that being regarded by most employers as an item which needs careful scrutiny. That is followed by the two columns I have just mentioned, namely, one for fuel and oil and one for tyres and maintenance.
"Next comes fixed costs and depreciation, and the fixed costs include your standing charges, that is your tax, insurance, garage, rent and interest and your establishment costs.
" Those four items—wages, fuel and oil, tyre a and maintenance, and fixed costs and depreciation—comprise your 'total expenditure.
" It is most likely that your chiefs, will wish to know the cost per mile-and that calls for two columns—one for the mileage run and another for the actual cost per mile.
"It is usual, also, to have a record of the total number of tons carried, from which you can get the cost per ton; that means another couple of columns. Then comes revenue and after that revenue per ton. The final statistical column, profit or. loss, represents the difference between total cost and total revenue. It is a good plan to leave a little space on the extreme right of the sheet to enter any remarks."
" That seems to me to be excellent," he commented.
" Wait a minute," I butted in, "you haveoverIooked She second point I made when we were discussing your suggestion."
" What was that?—oh, I remember, the necessity of differentiating between the specific sizes of vehicle."
" Exactly," I said. " In this sheet which, as I have explained, was prepared for a friend of mine, there was no need to 'deal with that point, as he had a comparatively small: fleet of vehicles of approximately all the same load capacity.
Filling Up a Specimen Form " All that you need, however, is to have one line for each -size of vehicle. If you do that it will add two columns— one for the number of vehicles and one to indicate the size. Now, as I see you have some of your data with you, we can settle down to filling up this summary for the month of September," We proceeded to do so and with the result shown in the summary which accompanies this article. All was plain sailing until we reached the line of figures relating to the two 2-tonners. For those vehicles there was no record of any revenue and I asked the reason for that.
" There is no revenue credited to those vehicles," he replied; " for the reason that they are really service machines. One is kept in London, the other in Liverpool, and they are used for collection and delivery services, picking up loads for the big machines and distributing the consignments which those machines deliver. The revenue from that work is credited to the vehicle which brings the bulk load." • " Would it-not be possible to allocate some credit, by way of revenue, to these two vehicles? " I asked. "
" Not without a good deal of trouble, which the directors seem to think is unnecessary."
" In that case," I said, " how do you suggest you deal with these vehicles in the monthly summary? "
How to Tackle a Tricky Problem " That is one of the questions I should have put to you," he replied, " had you not forestalled me. I must admit I had not given much thought to the • problem until the question of providing this summary arose, and now we have got down to it I am somewhat at a loss to know what to do."
" In effect," I said, " the matter is a simple one—simple, that is, with regard to its immediate disposal, although it may upset 'Rome of the provisions you have already made for establishment costs, for the reason that the cost of' these two vehicles must, in these circumstances, be debited as establishment -costs."
" Just one more point," he added. "Do you not think it would be advisable to give some figures for average cost per mile, cost per ton, and revenue per ton? At present those appear as blanks in the total for each month."
" By no means," I replied, "for those average figures would have no Meaning. You cannot give an average for cost per mile relating to a fleet of vehicles which varies in size, as is the case here. A similar criticism applies to the suggestion that there should be averages quoted for the cost per ton and the reveilue per ton." S.T.R