The Master Check on COSTS and CHARGES
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J HAVE recently finished the preparation of a new edition of "The Commercial Motor" Tables of Operating Costs,
which were previously revised in July, 1944. In compiling the figures, several matters of interest have arisen, and it seems that the time is opportune for%ventiliting these subjects, as shortly after the publication of this article the new edition will be available.
The primary object of the Tables is to inform road transport operators of the probable cost of operation of any kind of commercial vehicle. They thus serve as a basis upon which the cost of transport of any commodity may be assessed. Both hauliers and.passenger-vehicle operators will find them most helpful, because they give guidance as to the rates and fares that they should charge.
The word "probable," used above, has been selected deliberately; it is not suggested that the experiences of individual operators will not differ from those in the Tables. On the contrary, I know that they do differ.
A Standard of Comparison The most effective use of the Tables is as a standard for comparison. They are compiled from figures of actual cost supplied to me from time to tune by the many operators with whom I come into contact. I am always collecting these figures, taking every opportunity of adding to my knowledge.
The general trend of costs, as between one issue or the Tables and the next, is carefully checked, and each new edition embodies the results of observations which have been continuous since the appearance of the previous one.
Two matters of importance arise in this connection. First, the figures in the Tables have a practical basis; they are not theoretical. Secondly, they are averages and, therefore, are subject to Criticisms from those operators whose experience may be better or worse than the average.
After every new issue of the Tables has been published there are criticisms, and in all cases they balance. The number of those who say that the costs given are high equals that of those who say that the costs are low. Nearly every Gevernment department concerned with road iranspert uses the Tables as a standard of comparison_ All three Services employ. _them, se do the Ministry of Transport, the Ministry of Food and the Ministry of Fuel. The Milk Marketing Board does so, although those operators who carry milk may not think it possible. Many of the Road Transport Commissioners keep a copy available for comparison purposes, so do municipal transport managers, surveyors and so:tin. '
Many commercial-vehicle salesmen use them in the same way, especially when they need authoritative figures of cost emanating from an unbiased source, as in this case. They invoke the Tables to substantiate arguments relating to cost which they may put before their customers.
Clues to Irregularities Any operator may use the figures as a check upon his own costs. In so doing, however, he should appreciate that conditions of operation may affect his results. Where conditions are favourable, yet the operator's costs are equal to, or perhaps higher than, those in the Tables, some investigation is required into methods of use, ways in which the vehicles are driven, possibilities of pilferage, and so on.
Hauliers can make effective use of these Tablas, as a standard of comparison when considering the rates that they may be earning. In adopting .them for that purpose, however, operators should remember that the rates and charges figures are minima. The way in which the Tables may be used is simple. Take the case of an offer of traffic involving, for example, 800 miles per week with a 6-tonner. The revenue which the operator will earn at the price quoted is, say, £40 per week. All that he need do is refer to the corresponding figure in the Tables, and if the figure be £41 or £42, he will know at once that there is not much profit in the job. On the other hand, if the price that he is likely to get be £45 or 'upwards, as compared with £41 or £42 in the Tables, he may safely accept the rate suggested, unless he expects that there will be some difficulties to increase his costs and diminish his profit.
Insurance Against Omissions I have always insisted that the most satisfactory way in which to ensure that a collection of cost records is complete and that it contains no extraneous items, is to check against the 10 headings provided in "The Commercial Motor" Tables of Operating Costs. If the operator ensures that he has made provision for entries under every one of those 10 headings and if his entries be reasonably accurate, he cannot go far wrong in assessing his own costs. In any suggested method of cost recording, these 10 items should always be used as the basis. I am often asked what provision is made in the Tables for
vehicle-time lost because of the need for overhauls, repairs and so on. The answer is that the standing charges, with the exception of wages, are assessed on the basis of a 50-week year. Although tax may be £30, the entry in the Tables is 12s. per week, which is one-fiftieth of £30. I deal similarly with insurance premiums and so forth.
Wages are treated differently, although the result is the same. In the amount quoted in the Tables for wages, there is provision not only for insurance premiums, National Health and unemployment contributions and so on, but also for the equivalent of a fortnight's holiday with pay, so that there, again, the figures apply to a 50-week year.
How Tax is Calculated As regards the first item, licences, one or two criticisms have arisen. For instance, in the current issue of the Tables, the cost of licensing a 6-tonner is quoted as £35 per annum, or 14s. per week. It is pointed out that many 6-tonners, especially hydraulic tippers and livestock-carrying vehicles, exceed that limit. The answer is that the great majority of ordinary 6-tanners comes within the weight limit quoted. The difference under the new scheme of taxation is, in any case, small, and certainly insufficient to justify adding a penny or twopence to the amount in the Tables in an endeavour to make it a true average.
1 know that Mr. G. W. Irwin, a" great friend of mine, who is secretary of the Eastern Area, Road Haulage Association, in assessing figures for cost and rates for any commodity, takes as a basis for tax the total of four quarterly payments. For Mr. Irwin that is perfectly sound, as he knows that most operators in his district deal with their vehicle licences in that way. For me, treating the subject as a whole, that is not practicable.
It is frequently suggested that wages should not be included in standing charges, because in a number of cases the wages fluctuate from week to week. The answer is that these Tables give the cost of operating vehicles on the basis of a 48-hour week.
This raises an interesting point. If the basis of the 48-hour week be accepted, the item of wages is undoubtedly a standing charge.
Misunderstanding About Insurance Although it is clearly stated on each page of the Tables that the amounts quoted for insurance are those for vehicles operated by ancillary users, I still receive criticisms from haulier operators, who say that they have to pay more for insurance premiums than is set down in the Tables. I am well aware of that, and in dealing with any haulier's query I usually take the amount for insurance and double it; that is to say, double what is in the Tables.
The figure quoted in each case is one-fiftieth part of the annual premium for a full comprehensive policy, assuming that the vehicle is operated by. an ancillary•user whose headquarters are in a fairly thickly populated business centre, but not London. No provision is made for " excess " or for any special condition, on account of which insurance com panies offer reduced premiums. • I am aware that there is a difference of opinion, especially among hauliers, as to the wisdom of accepting an excess of .E5 to £25; Some operators have told me that they find it profitable to do so. Again, I cannot, in such a publication as the Tables, take into consideration the special rates which are quoted for large fleets, and cases where the experience of claims has been particularly favourable and the insurance company agrees to reduce the amount of the premium for that reason.
37 Years of Argument
It is about the item of interest that most controversy has raged. This has continued for nearly 37 years. I am often asked; "Why put interest in at all? It is not a cost. Interest is the profit that one makes. Or do you mean interest on hire purchase?"
On the other hand, those who agree that the item of interest should be included, seldom concur in the percentage which should be used.
I have been exasperated about this problem many a time, and, having in view the small amount involved, I have nearly given in and left it out. I have never yet gone quite so far as that, because I firmly believe that, as a matter of principle, the item, interest, must be included in any comprehensive schedule of 'Operating costs.
First, let me dispose of the fallacy, prevalent among many
operators, that the amount set down for interest is not something which comes out of the vehicle owner's pocket. It does.
As a simple explanation, a vehicle is bought for, say, £1,000. Had that sum been invested it would have earned a certain interest--say, for the sake of argument, 4 per cent., yielding £40 per annum. Instead of investing it, the operator has sunk the money in a vehicle, and, having done so, he is £40 per annum out of pocket. He must get that money back before all the expenses involved in the operation of that vehicle are amortized.
The next point to consider is the amount—or, more precisely, the percentage—which should be allowed. Strictly speaking, I agree that this should bear same relation to the average amount which is being earned by money invested at the time. The trouble is that the percentage fluctuates between one issue of the Tables and the next, so that it is impossible to adhere to that rule.
, A Good Average
Moreover, to attempt to juggle with the operating-cost figures is not worth while, because the amount is small in comparison with the rest. It is for that reason that I have for some time adhered to the figure of 4 per cent. as being sufficient to meet the circumstances at any time during the currency of any particular issue of the Tables. There is a school of thought which takes the view that the amount debited as interest should fall annually as the vehicle depreciates. For example, if the vehicle costs £1,000, it should be debited with £40 interest only in the first year. If it is being depreciated over five years, then in the second year its value will be £800, and the intetest debited should be 4 per ceht. of £800, which is £32, and so on. I agree to that method, subject to the condition that the operator invests, as a sinking fund, the annual amount by which the vehicle is depreciated. In that way, by the end of the first year he will have invested £200, and thus he will, during the second year, lose only the interest on the £800. The number of operators who follow that course is small.
Formula for Interest
There is a formula for working out the amount of interest N + I on the basis of the above theory. The formula is — L '214 Where N is the number of years over which the vehicle is depreciated, and I the rate of interest. The result of the calculation is the average rate of interest to be debited per annum throughout the five years..
In the case of a vein& depreciated over five years, with interest at 4 per cent., the formula will work out as follows: 5 + 1 . . 6 4 .
4 .= which is 2.4 per cent.
2 x 5 10 The formula has been worked out in this way: For the first year the interest is on the full amount invested, and must he a full 4 per cent. of the original amount. In the second year it is four-fifths, because the original amount is diminished by one-fifth, which is 3.2 per cent. on the original investment. In the third year it has sunk to three-fifths (2.4 per cent.), in the fourth to two-fifths (1.6 per cent.), and in the fifth to one-fifth of the total (0.8 per cent.). If those figures be added the total is 12 per cent. over five years. Divide that by five and the average is 2.4 per cent., which is the same as was obtained in the formula.
Allocating Hire-Purchase Charges Readers should remember that by " interest " I do not mean interest on hire-purchase contracts. I must-repeat that these Tables are designed to show the average cost of operating specific zones and types of vehicle. For them to be of any use as a standard of comparison, the same basic figures must be employed for all of them. The basic figure for interest has already been set out.
If some few operators decide that they must acquire their vehicles through hire-purchase companies and pay a rate of interest much greater than 4 per cent., provision for that excess must be made elsewhere. It is not a vehicle-operating cost in the sense which it is understood in preparing the Tables, and, as readers who have studied my occasional articles on establishmemecosts will remember, hire-purchase is an item for which provision is' Made in establishment costs. S.T.R.