An Operating Cost ecords Quiz
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The Fifth Article in this Series Provides an Explanation of the Items Which Appear in the Accompanying Simple Analysis Sheet and Some Ideas on How to A/lake Use of Them
THE whole of the previous article in this series was taken up in describing how I explained to my young friend, who is entering the haulage industry, why I always prefer that depreciation should be calculated on a mileage basis. I thought I had convinced him that I had sound reasons for my preference, but he was not entirely satisfied that he would be able to apply that method to the books he was going to prepare.
" Yes," he said, at the end of my rather 'long explanation, " I see your point, but as you have already admitted that the need for dealing with depreciation on a mileage basis does not apply to a business like ours, I shall probably have some difficulty in persuading my chief that his preference for 'depreciating on a time basis is incorrect. Therefore, I would rather like to discuss the subject of depreciation from that point of view."
" Carry on," was my quick answer.
" Weil," he replied, " in the first place he seems to depreciate the total cost price of the vehicle over a period of four years. Now, I wonder if that is right and particularly I would like to know whether it would not be advisable to use the method of depreciation as allowed by the Inland Revenue authorities, which is 30 per cent, per annum."
Why the Value of Tyre Equipment Should Be Deducted " In the first place," I said, " I am of opinion that he is incorrect in not deducting the value of the tyres from the initial outlay. I have given you sound reasons for that and I am not prepared to depart from them. In addition, your accounts will be more accurate if you make provision, in the way I have explained to you, for what is called the ' residual value ' of the vehicle, that is the price you are likely to obtain in part-exchange when you replace it.
" Thirdly, I think you are quite safe, in a vehicle of this class, to depreciate it over a period of five and not four years, especially having in mind the fact •that the mileage is about 40,000 per annum. If you keep it for four years it has run only 160,000 miles, whereas a vehicle of this type is quite good for 200,000 miles before its maintenance costs begin to become excessive.
"It may be of interest," I continued, "to calculate the amounts you will have to allow for depreciation according to these various methods.
" In the first place, if you take the initial cost price of £1,675 and depreciate the whole amount in four years that is equivalent-to £419 per annum, which is practically £8 per week. If you depreciate it over five years, it is £335 per annum, which is approximately £6 10s. per week.
" Now, if you deduct the value of the tyres, so that you get £1,550 'as a basis for calculating depreciation, the figures are as follow :—For four years, a total of £390 per annum, or £7 10s. per week ; for five years, £310 per annum, or approximately 26 per week.
" Then there is the third method, in which I suggest you allow £250 for the residual value, leaving £1,300, in which case, if you depreciate over four years, the annual amount is £325, which is £6 5s. per week, and if you depreciate it over five years the annual amount is £260, which is £5 per week,
" If you take the figure we have for depreciation on a mileage basis, namely, 1.87d, per mile, that is equivalent to £6 4s. 6d. per week if you cover 800 miles per week."
Many Opinions Exist on the Assessment of Depreciation " There seems to he a considerable variety of amounts from which to choose," he butted in, " Agreed," I answered, " and one of the difficulties of reconciling operating costs figures is that there is such a ' difference of opinion as to how to reckon this and other items. Here you have a variation from a minimum of E5 per week to a maximum of £8 per week, and £3 per week difference is rather a lot.
Indeed," I wen/t on, " the fact that there is this difference of opinion as regards assessment of depreciation on a time basis confirms my view that the hest way is the mileage basis."
" But you haven't said anything about the assessment according to the methods of the Inland Revenue."
• " I left that for a separate explanation," I replied, " because the method is entirely different, and, to my mind, is not quite satisfactory as a basis for assessing the • operating costs of a vehicle.
"In the first place, your figure of 30 per cent, is wrong."
"But I saw it in 'The Commercial Motor' some few weeks ago," he objected, "and it was stated that Mr. Hindley, of A.R.O., had succeeded in obtaining a concession from the Inland Revenue authorities whereby the allowance should be 30 instead of 25 per cent."
•
"Yes, but that isn't all the story," I said. " Previously, the amount on which you could claim an abatement of income tax in respect of depreciation, wear and tear and obsolescence of a motor vehicle was first 20 per cent, of the value of the vehicle at the commencenient of the financial year, plus one-fifth of that amount, the claim to be made in respect of the year following that for which assessment was made. In effect, you will see that the total amount on which you can claim abatement of income tax was 24 per cent, of the value of the vehiale.
"The newest concession is that the amount is made up of 25 per cent, of the value of the vehicle plus one-fifth of that, which is a total of 30 per cent." "Quite," he ieeerjected, " then, how am I wrong when state that the depreciation is 30 per cent.? " "Because actually the depreciation allowance on your
e vehicle is only 25 pet cent. What it means is this, taking the full amount of £1,675 as the value of the vehicle we are discussing. That machine was bought in 1939 and for the year of assessment 1940-41 (assuming the allowance applied to that year but actually it did not, as it only• commenced in the year 1941-42) the, depredation would be 25 per cent., which is £419 To that you would add onefifth, which is £S4, so that the total amount on which you could claim abatement of income tax would thus be
£503. For the next year, however, the value of your vehicle would be reduced, not by the total sum, £503, but by only £419, leaving the residual value as £1,256.
",Let me set it down for you year by year." And I did so according to the accompanying Table III, except that I havegcorrected that Table, allowing only 20 per cent. in the year 1940-41.
" Now you see," I said, retelling to this Table, " that whilst the allowance for depreciation and wear and tear is actually 30 per cent, of the vehicle value, the actual depreciation is only 25 per cent.
Depreciation on Year-by-year Value of the Vehicle " Moreover, and this is most important, that 25 per cent, is not the same as the 25 per cent, you had in mind when you talked of depreciating the vehicle over four years. It is calculated, not on the full value of the vehicle as it was at first, but on thz.• depreciated value year by year. You will note that, at the end of four years, by which time, according to the method you had in mind, the entire cost would have been written off, there is still a debit of £754, according to this Inland Revenue method."
" But according to this," he said, " it looks as though a vehicle would never be -written off entirely."
" Exactly," I replied, "but don't run away with the idea that there is anything unfair in the attitude of the Inland Revenue authorities in this matter. You can
allvays obtain full allowance for the actual depreciation if, when you dispose of the vehicle, you replace it by' a new one. You must make a special note of that point," I continued, " because it :5 important. The arrangement for the allowance for full depreciation, which I am about to describe to you, does not apply unless the vehicle is to be replaced by another."
" How is that allowance made? " be asked.
How the Allowance for Obsolescence is Calculated
" Simply in this way. Fuppose you sold the vehicle in 1945 for £250. The normal allowance for depreciation would be £106, with a wear and tear provision of £21. You should then enter up an allowance for obsolescence, and this is an amount calculated by deducting the amount you obtain for the 'vehicle, that is £250, from the £424 at which the vehicle will stand in the income-tax account when the depreciation of £106 has been deducted. That further £174 will be added to the amount which is allowed for abatement, so that the total of 'that allowance for the year will be £106, plus'221, plus £174, a total of £301, " I have found that the way in which this allowance is calculated differs a little according to the official concerned, but the result is substantially the same.
" Now, if you don't mind," I said. " we will examine our analysis sheet in some detail. Before we do so, however, I want you to agree, for the present, to let me have my way in the matter of assessing depreciation, that is to say, let it stand at 1.89d. per mile as we have previously calculated.
" If you find that your chief still prefers you to assess it on the basis of time, then all you have to do, having agreed upon the amount is to add it to the standing charges per week, and to delete column 20 in the analysis sheet—that which is headed ' depreciation.' " " Are you sure," he asked, " that if I do alter the analysis sheet as you suggest it will not materially affect the accuracy of my accounts?"
" Quite," I answered. " In the long run the results are not likely to differ materially. As I have already said, in
the case of a business such as yours, the method of calculation according to time is sound.
" What I do insist, and have achieved if I can persuade you to use this analysis sheet', either according to my way or to yours, is that all my 10 items of operating costs are included and reasonably 'accurate allowance has been made for each."
"I do see," he said, "that that is really essential."
I then dealt with the various columns briefly as follow:—
(2) WEEKLY MILEAGE. Information to be obtained from the driver's log sheet.
(3) TOTAL MILEAGE.. There may be some difficulty in obtaining this information. it is useful and an approximation is better than no figures at all.
(4) FUEL CONSUMPTION. This also Is obtainable from the driver's log sheet.
(5) FUEL COST. Ascertained by multiplying the number of gallons by the current price per gallon.
(6) TOTAL QUANTITY OF FUEL TO DATE. There may be even greater difficulty in obtaining this, than in obtaining total mileage to date. The information is useful and AI no available for the past, provision should be made for keeping a record in the future.
(7) WEEKLY M.P.G. This is the result ol dividing the figure in column 4 into that In column 2.
(8) M.P.G. ^0 DATE. This is also obtained by dividing the figures In column 6 into taose in column 3.
191 OIL' CoNsensmosr. Obtain the information from the driver's log sheet (10) OIL OOST. Thls again is gallons consumed by price per gAtea. (11) TOTAL QUANTITY OF OIL TO DATE. The same comment, applies here as in reference to column 6
(12) WEEKLY M.P.G. Divide the figure in column 9 into that in column 2.
(13) M.P.G. TO DATE. The figure in column 11 divided into that in column 3.
(14) Erristazino TYRE COST. The mileage per week from column 2 multiplied by 1.2d., the miles run during the week.
(151 ACTUAL TTRE COST. Separate provision has to be made for recording tyre cost and that will have to be dealt with subsequently. 1161 ESTIMATED MAINTENANCE. This is the miles per week from column 2, multiplied by 184d, the estimated maintenance cost per mile.
(17) ACTUAL LABOUR. The entry in this column is to be obtained Irons the time sheets of the men in the shops. Driver's time spent on this work should not be recorded. This is unfortunate because where the driver does assist in washing and cleaning and o on the figure for Cost of maintenance Is. inaccurate. To include the cost of the driver's time would Involve complicatian not justified by the result. (18) ,AcivaLeMavsniArA. Enter in this column not only the coat of any materials aetually pumnased but the total amount of invoice(' for repairs completely executed by outside concerns. (19) AuguaL TOTAL. Needs no explanation. It is the sum of the amounts in columns 17 and Id (20) DEPREcIATION. Number of miles in column 2 multiplied by 1.87d. Per mile.
(21)3 Tens AoTOAL WAGES OF Yrisi DRIVER, isettromn OVERTIME AND ONUSES, IF ANY. Some operators prefer also to Include driver's expenses; with that I do not agree. I think that should be included in overheads or establishment costs.
(22), i231 and (24) need N no
(25) STANDING CEIATIOS A S. The weekly mount from the heading of (26) TOTAL WEEKLY COST. 'Phe sum of the amounts in columns 5, 10, 14, 16, 20, 21, 23, 24, 25 and Is the total cost of vehicle operation, Including the 10 items. with provision for eventual expenditure on tyres and MaintenanCe, also against the need for vehicle replacement.
(27) WEEKLY COST PER NIrr.g. This is ascertained by dividing the total in column 26 by the figure for weekly mileage in column 2. 128) TOTAL OPERATING COST TO DATE. It may be difficult to ascertain this at first but provision should be made for it in future accou lats. (29) COST PER Mii,u TO DATE, This is ascertained by dividing the figures in column 28 by the total mileage to date In column 5.
130) ESTABLISHMENT COSTS. The figure from the heading. 1511 TOTAL WEEKLY EXPENDITURE. The sum of the figures in columns 26 and 30. (32) REVENUE PER WEEK Needs no explanation. (33) Pnorn IOR Loss) PER WEEK. Note that in any week which shows a loss it is usual to enter the amount to red ink.