AT THE HEART OF THE ROAD TRANSPORT INDUSTRY.

Call our Sales Team on 0208 912 2120

TIME or MILEAGE for DEPRECIATION?

22nd January 1960
Page 86
Page 89
Page 86, 22nd January 1960 — TIME or MILEAGE for DEPRECIATION?
Close
Noticed an error?
If you've noticed an error in this article please click here to report it so we can fix it.

Which of the following most accurately describes the problem?

IEXPLAINED last week that when the operating costs or a wide variety of vehicles employed under differing conditions were being calculated, as, for example, when compiling " ' The Commercial Motor' Tables of Operating Costs," it was considered that, on balance, depreciation was best reckoned on a mileage basis. It is reasonable to assume that in the majority of cases commercial vehicles, as distinct from private cars, are acquired with the object of regular and extensive use. In such circumstances the mileage run will have a direct relation to the rate of depreciation.

But I admit that calculation by time is also commonly used and can even be more appropriate in special circumstances. This particularly applies when the overall mileage average is exceptionally low. Despite all efforts to achieve maximum use, there will always be some types Of operation, such as luxury coach travel or internal factory transport, where the annual mileage must inevitably be comparatively low, either because of the spasmodic nature of the work or the geographical limitation of operation.

The many increases in costs with which operators have been faced in recent years have been accompanied by a compensating drive for greater efficiency by an extension of trunk working, the employment of double shifts or other methods. As a result, for more general types of traffic, it would seem that the calculation of depreciation by mileage would be increasingly appropriate, rather than the reverse.

As an indication of the variations in the cost of depreciation per mile obtained by differing methods, I have tabulated examples relating to a 7-ton oiler (see page 829).

It is assumed that the initial cost of the vehicle is £1,525. To obtain the balance which it is estimated will have to be written off, it is first necessary to deduct from the price of the vehicle the cost of the initial set of tyres, which will be accounted for as a separate item of running costs. The cost of the set will be reckoned at £185. The ultimate residual value when the time comes to sell the vehicle is arbitrarily assessed at 121per cent, of the price when new—f 190. 1 appreciate that for various reasons this figure may vary sub. stantially in individual circumstances and I will refer to this aspect later. Deducting these two sums from the initial cost leaves a balance of £1,150. The cost of depreciation will, in the first instance, be calculated on an assumed vehicle life of 150,000 miles. This gives a basic cost per mile of 1.84d.

In the table, average mileages per-week, per 50-week year and per five-year period are shown in columns 1, 2 and 3 respectively. The mileages range from 200 to 1,200 per week, the equivalent of 10,000 to 60,000 miles per year. Under the sub-heading of method, columns A, B, C and D depict alternative ways of calculating depreciation.

In column A the straight mileage method is used, with the assumption that the vehicle life is 150,000. Whilst it would be exceptional for a 7-ton oiler to be employed on work involving very low mileages, if this did occur this method of calculation could prove unsatisfactory. In the lowest mileage group shown in the table-200 per week or 10,000 per year— it would take 15 years to accumulate the total estimated mileage life of the vehicle. Whilst vehicles of this age may be acceptable for some work, obsolescence may have to be considered in other cases. Some compromise would be needed and, assuming that it was not practicable to continue using the vehicle for 15 years, calculation would have to be on a time basis or some combination of both.

In column B the expense of the ultimate replacement of the vehicle is reckoned solely on a time basis. In this instance it is assumed that vehicles will be. renewed every five years, although, of course, the actual term of years can be varied according to individual circumstances. As shown in the table, there is a substantial variation in the cost per mile when this method is used. When only 200 miles per week are averaged the cost of depreciation amounts to three times the corresponding figure obtained when the straight mileage method is applied. When the weekly mileage aVerages 600 the depreciation cost per mile-1.84d.—is the same in both columns A and B. This is because the mileage which would then accumulate over a five-year period would be the same as the estimated vehicle life-150,000 miles. Whichever. method is used, the operators in both cases are expecting a similar amount of use from their vehicle before it becomes uneconomic to maintain further.

Whilst the costs per mile shown in column B relative to the higher weekly mileages of 800, 1,000 and 1,200 become progressively reduced, such calculations do, of course, presuppose that, because of favOurable operating Conditions, or maintenance standards above average, vehicle life could be . substantially extended beyond the basic estimation of 150,000 miles.

On work where substantial standing time is inevitable, it is sometimes prudent to incorporate in depreciation costs both elements of time and mileage. These are shown in column C, with the balance between time and mileage equal. Other ratibs could be Used if 'they were thought to be more appropriate. As in column B, the depreciation cost per mile steadily reduces as the average weekly mileage becomes greater. Thus, at 1,200 miles per week the relative cost of depreciation1.38d. per mile—is less than half the cost at 200 miles per week.

Although in column C there is this steady reduction in cost as the mileage increases, it is less steep and wide in range than the reduction shown in column B when the calculations were made solely on a time basis.

Under particular sets of conditions some criticism can rightly be levelled at all three methods.so far employed. For example, as already mentioned, the figtire of 1.84d. per mile shown in column A as the cost of depreciation when 200 miles per week are averaged may well be unrealistic, as it would imply a vehicle life of 15 years. Apart from competitive trading conditions, advances in vehicle design during that period may have made continued operation uneconomic.

Even so, there will be exceptions where these considerations do not apply. It is common practice, where medium-sized or large fleets are operated, to transfer: suitable vehicles after a period on long-distance work to local cartage and shunt work. Under these conditions, Jbsolescence is less important and vehicles may well continue to do useful work long after, they would have been uneconomic if employed on more exacting duties.

Although in the higher mileage ranges the application of the time method would be unrealistic, a similar criticism does not apply when depreciation is calculated on a mileage basis. Assuming appropriate steps are taken to arrange for the accumulation of funds to provide for the eventual replacement of the vehicle, the only effect that the higher mileage would have would be that the total sum would be available over a shorter period. Thus, with the depreciation cost per mile standing at 1.84d., and assuming 1,200-miles per week are averaged, the balance to be written off—f1,150—would be available in 21 years.

To those accustomed to keeping yehicles in service as long as possible and employing the traditional light and heavy dock system, this may appear an abnormally short period. It is not, however, unrealistic where the maximuns availability of vehicles is of prime importance; where substantial expenditure on maintenance facilities is discouraged, or where geographical conditions make any attempt at providing comprehensive maintenance facilities uneconomic. As operating costs are interrelated, it may be found cheaper to accept a higher expenditure on depreciation in return for a greater reduction in other items of cost. In any event, this situation would be more realistic than an arbitrary decision to replace vehicles over a specified term of years, irrespective of the mileage involved. In effect, to meet the needs of a particular policy of costing, the useful life of a vehicle would be increased or decreased regardless of the actual mechanical condition of the vehicle.

The principle adopted when compiling "'The Commercial Motor' Tables of Operating Costs" is to accept the calculation of depreciation on a mileage basis, with a slight adjustment when mileages are exceptionally low. As simplicity is important in any system of costing to be of practical use to small and medium-sized operators, this adjustment is limited to an increase of 10 per .cent, in the basic depreciation cost per mile in the lowest ranges of mileages relative to the type of vehicle operated.

Agreed Average As shown in column D, the increase comes into operation in this example when mileages average only. 200 per week, with a resulting cost of 2.02d. per mile. At 400 miles per week the cost reverts to the basic 1.84d. per mile. Although the life of the vehicle has been increased to '7+ years, this figure is not unreasonable, bearing in mind the agreed average of 150,000 miles where a more normal weekly average was achieved.

Earlier, when arriving at the amount it was estimated would have to be written off as the total cost of depreciation, an arbitrary residual value of 121 per cent., or £190, was accepted, giving a basic depreciation cost per mile of 1.84d. when vehicle life amounted to 150,000 miles. As with many other arbitrary estimates, there may in practice be wide variations in the actual amount obtained. If the resale value turned out to be double that estimated, the depreciation cost per mile would be reduced to 1.53d., but if the price obtained was only half that expected, the depreciation cost per mile would increase to 1.99d. S.D.

Tags


comments powered by Disqus