Why It Is Unwise to Compare Operating Costs
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It is Rarely Safe to Attempt to Compare Operating Costs, as Produced by one Haulier, with those of Another, for the Reason that Methods of Costing Differ so Widely
CHATTING the other day with a leading commercialvehicle manufacturer, and discussing current problems of sales and deliveries of new vehicles, he touched upon the question of operating costs. He said he had just had an interview with a potential customer who, in the course of the negotiations, had asked for operating cost figures of the ve,acle he, the manufacturer, Was trying to sell, so that comparisons could be made with figures for the fleet of vehicles the operator was running.
The manufacturer told me he had begged in be excused, not because he was afraid of the comparison, but because he was dubious of the accuracy of the data with which his own figures would be compared. He asked me if I thought he had done right.
" Definitely," was my reply. " You bad no other course which you could have followed with any safety."
The difficulty is one which I have many times encountered. It happens with big concerns, sometimes even when they are most meticulous about their cost records, and it occurs with smaller operators, too.
The reason is that there is no standard method of keep' ing cost records. Moreover, even in cases where the costrecord headings are alike there is the probability that the understanding of the term and the interpretation of individual headings differ as between one concern and another_
No regular reader of these articles _needs to be told my views on the subject: they have been expressed time and again. Current developments, and the experience of this manufacturer, suggest that this is an occasion for their restatement, viewing the matter, perhaps, from a new angle.
A System Which can be Applied Generafly The method I recommend is rigid in principle, but flexible in its application, so that it can be adapted as completely to meet the needs of the small operator with two or three vehicles, as of those of the large concern with hundreds of machines. .
It can be discussed now in a' way which will demonstrate the futility of comparing the costs of one operator with those of another and, at the same time, indicate the discrepancies which are likely to arise if such comparisons be made.
The first essential, so important in principle, is to segregate those operating costs which apply strictly to the vehicle. The second is to ensure that the schedule of those operating costs is complete, and that it does not include any items not fairly to be debited as operating costs pure and simple.
The standards by which the items may be judged, as to whether they may he included or not, are these: Are they ones which are equally applicable to every vehicle of the fleet; should or could they be included if the operator were, for his own information, endeavouring to compare the cost and performance of one vehicle with another?
As an example of something which should not be included, as failing to comply with the above definitions, we can instance-drivers' suasistt-rtie allowances. Take two vehicles of the same fleet, .alike in all respects as to sire.
capacity, type and so on. Each is covering a similar weekly mileage, say, 800. but one is on short-distance haulage, coming back to headquarters each night, whilst the other is on trunk service and £1 per week or more is involved for driver's subsistence allowance, garage • eXpenses and so on.
It is possible that the weekly cost of running each of these two vehicles may be the same, but, if the subsistence allowance goes down against one of them, it will, opparently, be the more expensive to operate. That is wrong, On the other hand, supposing the machine on local work carries a mate for the driver. His wages are, in effect, an operating cost, for, presumably, he is employed so that the work of loading and unloading the vehicle may be expedited. Not to include his wages would be to credit the machine with a performance which, in actual fact, could not be achieved without a second man, What I call the rigid underlying principle of cost-recording for commercial vehicles is precisely indicated by the items included in " ' The Commercial Motor' Tables of Operating Costs." There are 10 such items, of which five are standing charges and five running costs.
The five standing charges are: Road Fund licence, wages (including National Health, National Unemployment and W.C.S. insurance premiums), vehicle insurfnce, garage rent and rates, .and interest on the capital-cost cirthe vehicle. The five running costs are: Fuel, oil, tyres, maintenance and depreciation.
For the Small Man or Owner of a Fleet These are the 10 governing headings for the cost-record system and nothing should be added, neither should any single item be omitted.
How flexible this " rigid " system really is in its application may be judged by reference to two extreme examples—its adaptation to the purposes of the small man, and as expanded to give the details needed in costing a large fleet.
In the former case the minimum of time and trouble is available for costing, and the small operator has no need for precision in his costing. What he needs is a ringh guide which he can use as a basis for checking his revenues and assuring himself thatrhe is really making a profit and not losing money because he is overlooking some of his costs.
The scheme which I devised for that purpose asked for no more than that the owner should make a daily entry of the Miles run by each vehicle, the hours worked, and the fuel and oil consumed.
At the end ot the week these items were totalled, and the actual amounts expended on fuel and oil entered and added to fixed figures for (a) estimated cost-of tyres, maintenance and depreciation; (h) tax, plus insurance, rent and interest. Wages are added and the total cost is assessed for the week.
It should be explained that (a), estimated cost of tyres. maintenance and depreciation, is to be taken from " The Commercial Motor' Tables of Operating Costs," and is thus one figure, multiplied by the mileage, to be entered weekly. Then there is (b), which is a lump sum per week for tax, insurance, rent and interest, an amount which is the same, week after week, throughout the year.
There is, therefore, little in the way of hook-keeping to, be done at the end of the week, and the operator knows, within a reasonable approximation, what are his standing
charges and his runuing costs per hour anti per mile. That gives him figures from which be an check up against his sarnings and to see If the rates which he is charging are sufficient or not, A quarter of an hour's figuring each week is sufficient to do this.
Now we may take the other extreme, still employing the same basic system applied and expanded so as to give an operator, having a fleet of vehicles, exact information as to what his costs are, as well as an approximate estimation to thc same end, which he can utilize, from month to month, until his actual figures have accumulated" to such an extent as to make them really applicable. What I mean by this will be explained later.
The 37 Items Covering Vehicle Operating Costs lt takes 37 columns of an analysis sheet to provide for the collation of this information, and the column headings are;-1, Date ; 2, Work done; 3, Mileage; 4, Petrol (gallons and cost); 5, Petrol bonus when such a bonus is in force; 6, Lubricating oil (pints and cost); ,Columns 7 to 11, inclusive, apply to tyres. The first, 7, is the mileage charge, assessed on the basis of " The Commercial Motor" figures for the estimated cost. The remainder are to give actual costs, and they are 8, New covers and tubes; 9, Repairs (labour); 10, Repairs (material); 11, Scrap credit,
Columns 12 to 21 inclusive, are for maintenance, and, again, the first of these, column 12, is for an estimated amount per mile based on the figures in " 'The Corneaercial Motor ' Tables of Operating Costs." Then come, 13, Cleaning materials; 14, Labour (cleaning); 15, Water; 16, Engine and chassis (labour); 17, Engine and chassis (materials); 18, Body (labour); 19, Body (materials); 20, Electrical (labour); 21., Electrical (materials). Column 22 is for Depreciation, 23 for Road Fund licence, 24 for 'Driver's wages; 25, National Health and Unemployment Insurance (driver); 26, Employer's Liability Insurance (driver); 27, Mate's wages; 28, National Health and Unemployinent Insurance (mate); 29, Employer's Liability Insurance (mate); 30, Garage rent; 31, Vehicle insurance; 32, Interest on first cost; "33. Total cost; 34, Total cost per mile; 35, m.p.g. petrol; 36, m p.g. lubricating oil; 37, Remarks.
The method employee!, in this case, is to have 'one sheet per vehicle and to enter up these amounts as and when expenditure is made.
Column 7 (Mileage charge for tyres) and column 12 (Mileage charge for maintenance) serves as a check upon the actual totals, and they ensure that the operator is making estimates of his costs as a basis for assessing his rates and charges. They also ensure that he is making due provision, not only for what he has actually spent on those items, hut on what increasing amounts he. may have to spend as time goes on.
Different Accounting Methods but Main Items the Same The point which I wish to emphasize is that, iotwithstanding the vast difference between these two methods of keeping accounts, the original principle still remains the same, namely, that there shall be 10 main items, and no more, included in the schedule of operating costs.
In the first System they have, for the sake of simplicity and ease of costing, been consolidated so that there is little work to he done. In the second system the items have been expanded and set out in more detail so that the operator who is responsible for a big fleet can the more accurately' determine how his money is being spent, and where there is opportunity to economize.
Having got so far I can now turn to the point that I raised earlier in the article, namely, the difficulty of comparing the costs figures of one operator with those of another. I can best do this by taking the old, familiar, 10 items and indicating the differences that may possibly arise es between the practice of two operators.
Take the case of a 6-ton oil-engined vehicle. The first item on the list is taxation, which is Set down at 14s. per week, or E35 per annum. Respecting this item there is not likely to be any error, or much difference, as between one and another.
Nor is there much room for differences in respect of wages. Every haulage contractor, these days, is not merely morally, but legally, bound to pay the same rate of wages and, although I still believe there are isolated cases of default, the general role is that those wages are paid.
A different story arises when we come to the third itemgarage rent and rates. Quite a number of operators make no debit against the vehicle on account of rent and rates; some regard this item as part of their general overheads. The building they occupy is, in part, given to garaging the vehicle, for repairs and maintenance, possibly for storage and offi-ee, and some of it may even be set aside for some subsidiary business run by the operator. The rent and rates of the premises, as a whole, are set down as overheads. That is all very well in its way and, so far as the purely accountahey aspect is concerned, no fault can be found with it. Assume, however, that, of the two operators whose figures we are thinking of comparing, one debits his vehicle with rent and rates at, say, les. per week, whilst the other does not. There is our first slip up.
Next, as regards insurance. The full amount for a haulage contractor, who pays a premium on a fully comprehensive policy, will approximate to El per week, that is if he has only a couple of vehicles, and is not entitled to any special discounts or fleet rates. On the other hand, an operator with a fleet of 20 to 25 vehicles can obtain a comprehensive insurance policy at, approximately, 410 or 412 per vehicle. Clearly, if we are trying to compare vehicles for the. purpose of ascertaining which is a more economical machine, there is an item here which ought not to be considered or, preferably, let it be considered and set down, and full cognizance taken of the difference 'whencomparing the vehicles and their economics.
Capital Cost and its Effect on the Standing Charges
We will leave the item of interest as not being likely to effect the result either way, so long as it is recorded. Here, again, there is the risk that the one operator may debit his vehicles with interest on capital cost whilst the other may not. The difference may he as much as 440 per annum. That concludes the standing charges.
Turning to running costs, fuel consumption is the first item and, in point ol fact, it is here that basic comparisons' really should commence. The average figure quoted in The Commercial Motor' Tables of Operating Costs " is 1.44d. per mile, the equivalent to I5i m.p.g. 1 think that is a fairly representative figure for the fuel consumption of oil-engined vehicles. At the same time, there are vehicles which, on performance, can improve upon this, and that 16, 17, and even 18 m.p.g. are possible. If one of the competing vehicles is covering 18 m.p.g. then the cost is, approximately, only 1.42d. per mile for fuel, showing a saving of one-fifth of a penny for every mile run, which is considerable.
There is room. too, for an error in coinparing the consumption of lubricating oil and, although the amount is not great, there is a difference in principle which ought to he fully appreciated while any comparisons are being made. Some operators, as I well know, do not trouble to debit their vehicles with the cost of lubricating oil. Each man draws the oil be %Vents from the garage, and the total 'cost is debited against the fleet.
Method of Procedure Will Affect Operating Costs Figures
That is in order so far as the one owner is concerned, but it gives rise to misunderstanding if the figures of an operator who adheres to that procedure be compared with those of another, who not only enters, meticulously, the day-by-day lubricating oil consumption of each vehicle, but debits against' it the quantity of oil which is put into the crankcase evety 2,000 or 3,000 miles when the sump is emptied.and refilled.
Respecting tyres, I have many times pointed out that if the record of tyre,costs is to be correct the opeeator must, so soon as a vehicle is put into commission, debit it with the cost of a new set, That is only logical because, when we assess depreciation, we first of ail take away the cost of a set of tyres from the initial price of the vehicle and calculate the depreciation du the net cost of the vehicle
without tyres. S.T.R. (To be continued.)