Providing for the Future
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DURING the past two weeks this series-has been devoted to a description of a recommended cost sheet and the method of its compilation. Only by keeping track of current expenditure can an operator satisfy himself that he is both achieving and maintaining working efficiency and has a sound basis for calculating,chargesior submission to customers.
. But in order to make the maximum use of such a vehicle cost sheet, the significance of the terms used in commercial vehicle costing. must be understood if both correct results and their intelligent interpretation are to be achieved.
By virtue of their use over many years, it has been proved convenient to divide the total expenditure incurred in operating a commercial vehicle into 10 items, five under the heading of standing costs and the remainder' classed as running costs. But although this division is practical, giving a clear record of expenditure, it must not be overlooked that such divisions arc arbitrary, at least to some extent. Despite this segregation the 10 itemsremain interrelated.
Because standing costs are incurred whether the vehicle is on service or not, it is convenient to calculate these on a time basis, whether per year, per week or per hour. Running costs are, however, incurred when the vehicle is operating and vary directly, with minor exceptions, in relation to the mileage run.
In addition to this division of operating costs into two groups, there is also more than one purpose' to which the ultimate results can be put. They can be used to check current efficiency in comparison with the operator's previous experience or, alternatively, with the results obtained from other users operating under similar conditions.
Further use to which such operating costs can be put is to provide a basis on which to estimate future costs, either with a view to formulating charges for work likely to be undertaken in the immediate future or for the setting up of a system of budgetary control. It will be seen, therefore, that there is this further division between past, current and future costs.
• Provision has to be made for the fact that operating costs can also be divided between those incurred before the vehicle is put on the road, those incurred practically concurrently with the mileage run, and deferred expenditure. It is this last division of operating costs, coupled with a refusal or inability to keep adequate records that has been the cause of many operators going out of business.
IT is unfortunate, but nevertheless true, that the growth of credit finance business which has facilitated the acquisition of new vehicles by owner-drivers and small operators could also eneourage rate-cutting, through ignorance. This is because, with a new vehicle, operating costs which have to be met immediately are reduced to a minimum. Therefore, unless the operator is fully acquainted with the existence and significance of all 10 items of operating coats he can well be under the illusion, during the early stages of operation, that his overall expenditure is less than it really is.
To emphasize this point the operating costs of a popular size of vehicle: namely a 7-ton oiler, will now be given, with a division as to immediate and deferred expenditure.
It will be assumed that the unladen weight of this 7-tonner is 3 tons 4 cwt. with a resulting annual licence duty of £46 10s. This is equivalent to a weekly standing cost of 19s. 5d. calculated on the basis of a 50-week year to allow for two weeks when the vehicle may be off the toad for major overhaul or driver's holidays.
The total cost of driver's wages to the employer inclusive of insurance contributions and an adjustment to permit holidays with pay, is reckoned at 110 Ss. 11d. for a basic 42-hour week. Garaging rents and rates are reckoned at 14s. 2d, a week.
Assuming the vehicle is operating on A licence in a mediumrisk area, the total insurance premium per annum will be £124 10s., or £2 9s. 9d. a week. Interest charged at a nominal rate of five per cent, on the initial outlay of £1,383, would add Li 7s. 8d. a week. The total for these five items of standing costs is therefore 115 19s. I Id. a week. If this vehicle averages 600 miles a week, the standing costs per mile would be 6.40d.
WITH fuel oil purchased in bulk at 4s. led. per gallon and a rate of consumption of 15 m.p.g. maintained, the fuel cost per mile would be 3.32d. Lubricants' are reckoned at 0.28d. and tyres at 1.490. a mile. This latter calculation is based on an estimated mileage life per set of 30000 and the cost per set of £186.
• Maintenance, inclusive of washing, servicing and •repairs, is reckoned at 2.580. per mile, whilst depreciation adds 1.69d. per mile based on an estimated vehicle life of 150,000. The total running cost is thus 9.36d. per mile, which, when added to the standing costs, gives a total operating cost per mile' of 15.760.
On the basis of an average of 600 miles a week the corresponding running costs per week would be: fuel £8 6s, Od., lubricants 14s. Od., tyres 13 14s. 6d., maintenance £6 9s. Ode depreciation 14 4s. 6d.; total running costs £23 8s. Od: and total operating costs 139 7s. 11d, a week.
These 10 items of operating costs will now be divided into those which have to be met imtinediately and deferred expenses. For this purpose payinents made within, say, a month (as generally applies to many purchases) will be .considered "immediate." Also, for practical purposes, licence arid insurance costs will be considered as deferred," although these are paid initially before the vehicle is put on the road. But, although these initial payments are usually associated with the total initial outlay, provision has to be made for successive yearly renewals.
Dealing first with standing costs, for the reasons just given, the amount of 19s, 5d. in respect of licensing will be considered a deferred cost. Wages obviously are an immediate expenditure. Payment of 14.s. 20. in respect of rent and rates could valr!.
according to individual circumstances, but, as payment at quarterly or longer intervals would be usual, it will be considered here as a deferred expense. As already stated, insurance premiums at the rate of 12 9s. 9d. will also be reckoned as a deferred cost as will also interest at £1 7s. 8d. a week. Thus. of a total standing cost per week of £15 19s. lid., £5 1 Is. Od. could be considered deferred expenditure when operating•this 7-tonner 600 miles a week.
Similarly with running costs, fuel (is 6s. Od.) and lubricants (14s. Od.) could be considered immediate expenditure. Assuming this particular operator started with a new vehicle the two items B49 of tyres (£3 14s. 6d.) and depreciation (£4 4s. 6c1.) will be reckoned as deferred expenditure.
The remaining item of running costs—maintenance—requires special consideration. As already mentiond this item includes washing which presumably will be done periodically, say weekly.
This portion therefore will qualify as an immediate expenditure. Allowing for a nominal 15s. Od. per week for this task, the remaining balance of £5 14s, Od. is reckoned as deferred cost.. Therefore of the total running costs (£23 8s. Od.) £13 13s. Od. is deferred expenditure. Correspondingly, of the total operating cost of £39 7s. 11d., £19 4s. Od. (or over 48 per cent.) is deferred expenditure.
Obviously if no provision is made to ensure that this deferred expenditure can be met, as and when required, the new operator must eventually run into financial difficulty. But that would not unfortunately be the only result of his imprudence. Because no account has been taken Of the several items which make up the total of £19 4s. Od. in the example quoted, it is probable that the operator has not only been under an illusion as to his real costs, but has also formulated his charges accordingly. Subse
quently, even if he then recognizes his error:, he will be •faced with the difficult task of increasing his rates to customers who have already been conditioned to what to
them are attractively low charges.
It is to avoid such unfortunate eventualities that the setting up of a sinking fund is recommended, recorded on a form similar to the one shown alongside. By the keeping of such a record the operator could be assured of the balance between estimated deferred expenditure and actual expenditure at any time.
As with the vehicle cost already recommended, one sinking fund sheet is devoted to each vehicle and the vehicle number and period to which the sheet refers is appropriately recorded in the right top corner. To facilitate the ordering of stationery a reference number can be included in the left corner and it would assist internal use if the number chosen was in logical sequence with other forms used in the operator's costing system.
At the top of the form under the heading "Estimated Deferred Expenditure" the amount of standing costs per week and, running costs per mile which have been previously calculated as deferred expenditure are recorded. In the example just given relative to the 7-ton oiler these amounts would be: standing costs per week £5 lls. Od. and running costs per mile 5.46d, (£13 13s. Od. divided by 600).
Beneath this heading the main section in the form is divided between "Estimated Income" and "Actual Expenditure." The
first column under "Estimated Income" provides for the insertion of the date which, as with the majority of other returns which the operator should keep, would normally refer to a week ending date. The actual weekly mileage is then entered.
AB/TR,13 ESTIMATED INCOME
56
r.L.)
3
'112
2 Date Week Ending 1
followed by the amount of standing costs per week, as shown in the heading, which will remain constant until such time ks there is need for revision of operating costs as a whole.
In the fourth column the amount of deferred running costs is obtained by multiplying the running costs per mile shown in the heading by the actual mileage for the week. The addition of standing and running costs gives a total for entry in column five, whilst an accumulative total is maintained in the adjoining column which completes the first section.
The first column of the next section (devoted to actual expenditure) is also provided for the insertion of the date, because this may not necessarily coincide with the regular weekly entries made in the first section. In fact, it is precisely because much of this deferred expenditure is incurred spasmodically that this record is kept.
The column alongside provides for the description of the repair or replacement giving rise to the expenditure, the amount for which is entered in the ninth column_ This amount should include both 'labour and materials, obtainable from job sheets where the operator provides his own maintenance or, alterna tively, from invoices from public garages. Once again an accumulative total is kept in the next column.
By subtracting the last amount shown in column 10 from the corresponding accumulative total in column six, the balance to date can be entered in the final column 11. These successive final totals will provide an accurate guide as to the operator's current position and his ability to meet bills for replacements and repairs which, from his practical knowledge, he may be aware will shortly be due.
In addition to the more immediate needs of maintenance costs, the operator will have the reassurance that sufficient funds -are being accumulated to meet annual payments of licence duty and insurance premium. More long-term still, and therefore of greater amount, the sinking fund will also provide a means for ensuring that funds are available not only for major overhauls but for vehicle replacement when this ultimately becomes necessary. S.B.