Q In the recent CM Costs that Count series the subject
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of depreciation received detailed attention. Your writer on March 31 stated that he preferred to calculate depreciation on a time rather than a mileage basis but did not fully explain his reasons for saying this or what advantages are to be gained by the selection of one method or the other. We have been discussing this subject at some length in our company and although we use the time basis at present we are not agreed on whether this best suits our purpose. Could you comment further on the matter?
AThe reason why our staff writer chose to calculate depreciation in terms of time rather than mileage was because he sees this as the more obvious and easier way of specifying the anticipated life of a vehicle on the day when it is first purchased which, in theory, is the day when this decision has to be taken.
Most businesses budget on a time basis, so therefore vehicle life might just as well be aligned to the budgetary system, as the annual depreciation cost of an individual vehicle is such a large proportion of the annual budget relating to that vehicle.
However, the method chosen to a large extent depends on the existing knowledge within the company of the anticipated vehicle life based on previous experience. For example, if the vehicle is to be employed on a known regular contract whereby the mileage to be covered in• a period and for the whole of the vehicle life can be accurately estimated then it is reasonable to depreciate by mileage. The same also applies if the company has a sophisticated maintenance system with efficient and detailed documentation from which it is possible to make a really objective cost and life • analysis of vehicles as a whole and of their individual component parts. Such an analysis would provide the basis for a much more intelligent appraisal of vehicle specifications and the consequent selection of vehicles more ideally suited to the job required of them.
Purchasing on such positive lines rather than a haphazard selection based on intuitive reasons alone places the operator in a far better position to estimate accurately the life expectation of the vehicles he buys and their individual components in terms of mileage rather than the much wider span of time measurement in years.
As was pointed out in the article, the CM Tables of Operating Costs show depreciation as a running cost; therefore vehicle life is estimated by mileage rather than time. The operator using the Tables
for guidance can relate the depreciation shown back to a time figure by multiplying the depreciation cost per mile by the weekly mileage then by the number of operational weeks in the year.
For example in Table 3 a 16 tons gross, 10-ton carrying capacity four-wheeler covering 600 miles per week costs 1.29p per mile for depreciation. The calculation then is tis follows: 1.29p X 600 x 45 774p X 45
£348.30 per year
However, if this annual depreciation cost is multiplied out to give the vehicle life in terms of years it would be seen that this indicates a vehicle life of some 10 years (taking the cost of a new vehicle of this type as coming to about 13500 with body). This is probably a far longer period than one would normally expect such a vehicle to last despite the fact that it was only doing 2'7,000 miles annually.
Changing fashion and both technical and legislative obsolescence are likely to influence the operator to change his vehicles in less than 10-year cycles although they may not have achieved a really full life in terms of mileage.
On the other hand, a vehicle covering very high annual mileages will achieve its life expiry in much less than the 5/7 year span which is so commonly used in the industry.
These examples alternatively defeat the arguments for both a life based on time or on mileage because each depends on the circumstances of the operating conditions so that it is not really possible to state categorically which method to use or even which is best. The operator has to make his own decision based on his experience of the operating conditions to which his vehicles are subjected and on his knowledge of the technical specification of the vehicles he intends purchasing.