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Don't Forget
Page 104
Page 105
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)epreciation
AREADER has written to me to say that he is glad I do not recommend the use of the ton-mile. 1 gathered that one of his customers had been asking him to quote on the basis of the ton-mile, and he had been trying to meet the requirements of that customer. Then the reader saw one of my articles in which I stated that only rarely is the figure of cost per ton-mile useful. He promptly showed the article to his customer, who thereupon agreed to leave the item out of the accounts. All that he asks now is for his charges to be based on mileage, with which request my haulier friend is glad to comply.
The outstanding difficulty in using the ton-mile when assessing rates is that the figures for cost, based on that unit vary so much. If an attempt is made to apply the ton"-mile, confusion arises. This correspondent realizes, and has persuaded his customer that mileage or tonnage are the best bases for rates assessment. The really important thing is to have accurate figures for cost per mile; nearly all traffics can be dealt with on that basis.
My correspondent relates his reactions to other items of cost, beginning with depreciation. He has not hitherto realized, he says, that in calculating depreciation the cost of a set of tyres should be deducted from the initial cost of the vehicle to arrive at the basic figure on which, less residual value, depreciation should be calculated. Deduction of the cost of tyres is a necessity, although it is not by any means obvious to those who have not made a study of the operating costs of commercial vehicles. The point may be enlarged upon and made to serve as an object lesson in the meaning of the term "depreciation."
Negative Expenditure
Depreciation is not an out-of-pocket expenditure. For all that, it may also be described as one of the most important items of running cost. It is not a sum of money which the user must find for each mile the vehicle runs or for each week, month or year the vehicle is in use. It is a negative expenditure, a loss which is going on regularly and continuously but is invisible and, unfortunately, in many cases, unregarded.
The wise owner converts it into an out-of-pocket expense by setting on one side a weekly sum, preparing for the day when the purchase of new machine becomes necessary. The unwise owner overlooks that depreciation is going on all the time until, suddenly, he is brought to realize that the capital on which his business depends, namely, his vehicle, is nearly gone and he has no money with which to buy another to replace it.
The position is nearly tragic at times such as those through which we have recently passed when the cost of a new vehicle was nearly twice that paid for old machines, thus upsetting the calculations of the operator who provided for only the sums originally spent.
It is by considering what happens in the case of tyres that F 1 0 those who fail to appreciate the importance of depreciation may be brought to realize how vital it is not to overlook it. The cost of tyres is deducted from that of the complete vehicle before calculating depreciation, ostensibly because provision for tyres is made in another way: really we must go farther back than that. We must understand why it is that separate provision is made for the cost of what is, after all, an inseparable part of the vehicle. The reason is that the tyres depreciate much more rapidly than the rest of the vehicle and have to be renewed independently.
Nearly every user of vehicles knows that he must look forward to the time when a new set of tyres will be necessary although, as a rule, the user is fortunate in that he is able to renew the tyres one by one, so that the expenditure does not come as a big item. It still has to he provided for, however, and, for the owner-driver the wisest way of making that provision is to set aside a sum corresponding to the tyre cost over a given period.
Providing for Tyres
For example, if we take a 5-ton lorry and assume that the figure for tyres as given in the current issue of "' The Commercial Motor' Tables of Operating Costs" is correct at the time of writing (actually it is somewhat lower) the user should set aside lid. per mile towards the provision for new tyres, as they become necessary.
If the vehicle concerned is running 400 miles a week, he will put £2 Is. 8d. per week on one side towards new tyres and if he does that the expense of buying one or even a set of tyres will not come as a shock to him; he will be able to make the purchases out of what is more or less a sinking fund for tyres and will not need to disturb any investments or any other regular expenditure which the carrying-on of his business necessitates.
The fact that he must put on one side as much as per week or more to his tyre account will make him appreciate that quite a large sum of money is needed for tyres; a proportion can be saved by regular attention to them. In that connection I well remember the case of a haulier who was worried about his growing and high cost of tyres. I recommended him to take more care of them, with particular reference to inflation pressures, the removal of flints and other puncture-making foreign bodies, also the alignment of the wheels. As a result, his tyre bills were halved, whereas the cost of giving the tyres those attentions was small.
Now, if we can make this principle, so easily understood in connection with tyres, equally applicable to the vehicle itself, we shall get over that too-frequent oversight of depreciation which is responsible for so much loss on the part of hauliers.
The thing to do is to set apart each week or each month an amount sufficient to make up the loss in value which a vehicle has suffered during that period. Taking again the case of the 5-tonner and assuming, as we did before, that the mileage it runs averages 400 a week, the amount which
must be put on one side may easily be assessed, The original cost of the vehicle was, shall we say, £1,000. Deduct the cost of a set of tyres, £100, leaving £900. Take away the residual value, generally assumed to be one tenth, so that the basis for assessment of depreciation is £800 Assuming that the vehicle will need replacement after it has run 180,000 miles, the amount to set aside for depreciation is £800 (192,000d.) divided by 180,000. It is sufficiently accurate to take Id. as the depreciation per mile. The amount to set aside per week while the vehicle is covering 400 miles per week is thus 400d. or £1 I3s.. 4d.
We turn, naturally, from the consideration of this point to the next which is raised by this same correspondent, namely the proper allocation of depreciation, whether it should be set among the running costs or treated as a stand ing charge. There has always been a difficulty there, as I have admitted time after time. The Income Tax assessor prefers to measure depreciation on the basis of time rather than mileage and the question arises: Why go to the trouble of assessing it twice? It has to be done on the basis of time.
The answer is that for the purpose of assessing rates the income-tax method is useless and almost harmful. The income-tax method is to allow 20 or 25 per cent. on the falling value of the vehicle, which means that the amount will be different from year to year. For our purpose, which is to arrive at some figures which can be used as the basis for assessing rates and charges, we need a stable sum for depreciation, otherwise we shall have to alter our rates each year. That is obviously impracticable. So far as we are concerned, a vehicle deteriorates only to the extent to which it is used. Clearly, other things being equal, one that runs 100 miles a week is going to last much longer than one which runs 500 or nearly 1,000 miles per week Hence the only practicable way, of calculating depreciation from our point of view is to take it as a running cost.
In holding that point of view I am interested to have confirmation of my assertion from my correspondent. He is an experienced user and tells me that after trying to make use of it as a standing charge he came to the conclusion that it was much sounder practice, from the business point of view to take the figure as a running cost.
I propose to take, once more, this 5-tonner as an example on which we can work out this controversial matter. First I propose to work out the loss caused by deterioration on the basis of a standing charge, taking the figure already used for depreciation, Id. per mile.
Official Method First, according to the Income Tax authorities. The first year will provide for an initial allowance of 20 per cent, plus a wear-and-tear allowance of another 20 per cent. That means that in the first year the depreciation will be 40 per cent, of the initial outlay, that is, on £1,000. The allowance is thus £400, and the value of the vehicle falls to £600. That is the amount on which the depreciation for the second year must be calculated. The depreciation for the second year is 20 per cent. of £600, which is £120. For the third year ,the basis is £600 minus £120, which is £480. At the end of the fourth year the value is £384, the fifth £303, and so on. At the end of the seventh year it is less than £200. It should be noted that according to this method of reckoning depreciation the machine is never wiped off the books.
One point in favour of reckoning depreciation in that way is that it enables the maintenance and repairs expenditure to be dealt with in a logical fashion. The depreciation account is large at first, gradually falling as the vehicle grows older and the maintenance cost, small at first, gradually grows as time goes on, thus counterbalancing the drop in the depreciation allowance. The difficulty which makes it impracticable to use the two items in that way is that the conditions are not sufficiently balanced in all cases for the two items to be fairly and equally levelled. The maintenance cost for one vehicle may be the same, in reverse, as the allowance for depreciation, but not often. Usually one of the two items is much greater than the other and a proper balance cannot be struck.
If depreciation is reckoned at Id. per mile, as recommended, the vehicle running 400 miles per week and depreciated at Id. per mile would need to be replaced at the end of nine years (reckoning a life of 180.000 miles). If, however, the vehicle runs only 100 miles a week, it will last 36 years, which is absurd. On the other hand, if it runs 1.000 miles per week, it wilt he worn out in 180 weeks, that is 34 years, approximately.
Out of that difficulty has grown the compromise of reckoning depreciation on a double basis, on time and on mileage, half each. Thus, in this case, allow for five years on the time basis, taking half the basic value of £800 and spreading that over five years; make that a standing charge. Allow for depreciation on a mileage basis, £400 over 180,000 miles, which is id. per mile.
The allowance for depreciation according to that method would be in the standing charges an allowance of £80 per annum, 32s. per week; in the running costs must be entered Id. per mile, allowing for £400 to he written off in this manner. S.T.R.