• Allocating Establishment Costs
Page 28
Page 29
If you've noticed an error in this article please click here to report it so we can fix it.
Over a Fleet of Vehicles
Some Concluding Notes on Establishment Costs, with Particular Reference to the Allocation of the Total Amongst the Vehicles of a Fleet _Engaged on a Variety of Work
WHEN concluding the previous article, dealing with certain aspects of establishment costs which, it may be remembered, were discussed in some detail in " The Commercial Motor " dated April 20„I dealt with the allocation of the total amount of those costs amongst the individual vehicles of a fleet.
In doing so, I was careful to specify that the metho,d described was strictly applicable only in cases where all the vehicles were engaged on similar work. In the example under discussion that was so; all of them were on local haulage. That, however, is not always the case. A particular and important variation is when part of the fleet is on work of an essentially local nature, as, for example, the carting of sand and ballast, whereas, the remainder is on trunk services or, at any rate, on long-distance haulage. The case would be more extreme if, while some of the fleet were hauling sand and ballast, the rest were engaged on parcels collection and delivery. For, whilst the establishment costs in connection with sand and ballast haulage and the like are usually at their lowest, those arising from a parcels collection and delivery service, " smalls " as it is called, are at a maximum. Those for ordinary longdistance haulage come between those extremes, being nearer the upper limit than the lower one. Looking down the list of items and the amounts quoted in Table I in the article in the issue dated April 20, the following are amongst those most affected by the change, remembering that the figures there cited relate to jobbing haulage—not sand and ballast—over distances not exceeding 60 miles. I will deal only with the " probable " amounts, not those described as " minimum " or " maximum."
Big Differences in "Establishments" Office rents will be affected. Fr sand and ballast they .
will be lower-, say £10, but for long-distance haulage more than double, say 240. Similarly with rates, and in the
same proportion—£3 for the one, 218 for the other. The increase for long-distance haulage is due (a) to the fact that there is a good deal more clerical work _involved, and (b) because branch offices are usually required.
So also for lighting and power, and heating. They may be very low for sand and ballast haulage—probably 48 anc1.23—but as much as 220 and .212 respectively for the other class of work.
Owing to the preponderance of trunk calls, the expendi-. tura on telephone calls is much higher for long-distance work. Instead of 219, I would take 245, but only 210 for a business engaged in sand and ballast haulage. Audit fees will be 212 12s. and £2 2s. respectively for the two classes; law costs, say 28 8s. and 22 2s.; sundries £50 and 420; fines, 215 and 25.
Travelling expenses, in the case of a business concerned with sand and ballast, will be at a minimum, say 250, but easily 2200 in the. other case. Clerical wages may be as low as 2.100 in the former case, but will certainly be £320 in the long-distance haulage business. And so on down the list. To save space and frequent repetition I have compiled Table I, which accompanies this article, to show the three probable amounts of annual eXpenditure. Each of the totals is important. For the sand and ballast fleet it is 4439 4s. and on long-distance haulage £1,363 10s. Assuming that the total pay-load tonnage is the same in each case, that is 30 tons, a simple calculation gives us the figures of 5s. 6d. per ton of pay-load per week for the sand and ballast fleet; and 18s. 3d. per ton of pay-load per week for vehicles on long-distance haulage.
For the sake of simplicity, let us assume that the sand and ballast fleet is made up of six 5-tonners and the longdistance fleet of four 7i-tonners. Then, in the case of the former, the amount of the establishment-costs per vehicle per week is 21 7s. 6d, which, of course, is comparatively little. On the other hand, the amount of establishment costs to be carried by each vehicle in the long-distance haulage fleet is 26 17s., which is high.
As a matter of fact the figure of 18s. 3d. per ton is high, and I would be glad if readers would check the figures from Table I against their own experience to see how it compares. My own ektimate would have been from 25 10s.
• to 26 per week per vehicle.
I should like to digress for a moment here, for these figures are convenient as 'enabling me to explain why I have, for some time, refused to give figures for establishment costs or overheads as a percentage either of wages or operating costs.
Labour Costs Not a Fair Basis Take, for example, the suggestion that overheads should be assessed on the basis of wages, that is labour, which is the usual method in a good many industries. In the case of the 5-tonner, with the wage at 24 17s. per week (including insurance and provision for holidays, etc.), if I take the overheads as a percentage on wages* it is 25. On the other hand, as the amount for wages is the same for a 7f-tonner as it is for a 5-tormer, overheads at £6 17s. per week on a wage bill of 44 17s. per week is the equivalent of 142 per cent. Thus there is no reasonable basis for comparison.
Nor are we in any better position if we try to assess overheads as a percentage of vehicle-operating costs. Assume that the 5-tanners are each covering 500 miles per week. The operating costs will be in the neighbourhood of £20 and the amount of overheads-21 7s. 6d.—is just a shade under 7 per cent. If I assume that the 74-tortners are covering 800 miles per week, the cost of operation will be about 236 to £36 10s. and the overheads at 46 17s. are equivalent to about 19 per cent, of cost.
Now, to get back to our main argument, which is that of the allocation of overheads amongst vehicles of a fleet, part of which is on one kind of work and part on another, some discretion is called for.
Assume a mixed fleet comprising six 5-tonnerS engaged on sand and ballast haulage, and four 71-tonners engaged on long-distance haulage. As a matter of fact this is an example with which I had to deal some time ago. It is probably not true to state that the total overheads will be the sum of 2439 4s. and £1,363 10s. The total is likely to be less than that, because certain economies will be effected, and it is, of course, not always safe to assume that, when the vehicles of a fleet are engaged on two distinct classes of work, the establishment costs of each remain unaffected, For the sake of argument, however, we will assume that, in this case, the addition of the two amounts gives us the total overheads, and I will take the figure at 21,800. This is spread over 60 tons of pay-load, so that it means that each ton of pay-load carries 230 per annum, or 12s. per week. If the operator so desires he can leave the figure at that, and debit the vehicles engaged on sand and ballast with 23 per week, that is 5 tons multiplied by 12s, per ton, and the vehicles on long-distance work with 24 10s. per week each; the amount is calculated in the same way by multiplying 7i by 12. It is important to note that the total is 236 per week, or 21,800 per annum taking 50 weeks per annum as the basis' for calculation. Such an arrangement may be all very well for those of his vehicles engaged on long-distance traffic. It will put him in a favourable position to compete with other operators who are solely engaged on that class of traffic, and having establishment costs in the, neighbourhood of 16s. to 18s. per ton, which is 26 to 26 ,15s. per vehicle per week, as against his 24 10s. It may, however, lead him into difficulties with his sand and ballast quotations if he be competing with operators whose overheads are only 5s. to 6s. per ton, or 25s. to 30s.
per week per vehicle. His course ol action should be decided by circumstances. If, in his district, competition is keenest in the sand and ballast department of his business,' he may decide to lighten the load of overhead costs on the vehicles engaged on that work at the expense of the long-distance vehicles. In that case, be may decide to leave overheads as they are, that is 5s. 6d. against the vehicles on sand and ballast haulage, and 18s. 3d„ or thereabouts, against the longdistance vehicles. If he be up against particularly keen competition in sand and ballast, and conditions be not so difficult with the long-distance haulage, he may think it politic to cut the overheads on the former to 4s. per ton, which is only 2,1 per vehicle per week, and load the excess on to the long-distance vehicles, debiting them with 21 per ton of pay-load, or 27 10s per vehicle per week.
(Note that the total overhead, whatever manipulation may be effected, must always be 236 per week: it is not correct to take the 12s. per ton average and split it up amongst the vehicles, by taking 2s. per ton for sand and ballast work and 10s. per ton for the others.) If the competition in the sand and ballast side of his business be not so keen—if it be possible to envisage such conditions—he should raise the overheads on the sand and ballast vehicles to, say, 8s. per ton, or 22 per vehicle, and lower that on the long-distance vehicles to 16s. per ton, or 26 per week per vehicle.
As I have said, his course of action must be determined by conditions, and the point I do wish to make is that, if the fleet be engaged on a variety of work, it is not correct to allocate overheads according to the simple method T described in the previous article. that is to divide the. total of establishment costs by the total of tons of pay-load and allocate that to each vehicle according to its size, irrespective of the work it. is doing.
One other point beforeI leave this subject of establishment costs: it is one which has been raised by a correspondent. Suppose that of a fleet of 10 vehicles, one is temporarily out of commission. Is it not correct to load the rest of the fleet with the total overheads until such time as that vehicle is hack in service again? The answer is that it depeilds upon circumstances.
'There are two sets of conditions to be considered. In the first place, assume that the vehicle is out of commission as the result of an accident in which case, presumably, there will be a claim for damages either against some third party or against the insurance company. In such a ease, the claim will include the_proper proportion of establishment costs which have to be found, although the vehicle is unemployed. That, obviously, indicates that there should be no interference with the allocation of establishment costs as have been prescribed.
When Interference is Justified Op the other hand, the vehicle which is out of commission may be so because it is in for an overhaul, in Which case, according to the procedure which is advisable with a fleet of 10 vehicles, it will be taking its turn with the others, each vehicle being brought in for major or minor maintenance operations in order. If that be no then the total of overheads should be spread, not over the 10 vehicles, but over the nine which can be said to be consistently in use.
As a matter of fact, many hauliers with a fleet of that size, or even smaller, hold a licence for one spare vehicle, so that they may adopt the practice of putting one into the shops for maintenance work, taking each vehicle of the fleet in turn.
Another question which has arisen from th,is recent series of articles relates to the one which appeared in " The Commercial Motor" dated April 27, entitled "War-time Increases and Their Effect on To-day's Costs." A reader has asked me to analyse the various items of cost, and to indicate a percentage by which each has increased since 1940. I give the figures, but ask that they be accepted with due reserve: accuracy is not possible.
. The percentages are as follow:—Licences, no change; wages', 25; rent and rates, in most cases, no change; insurance, 10; interest, 25; overheads, 12i; fuel and lubricating oil, 5-6; tyres, upwards of 100; (One operator claims that the increase has been something like 800 per cent., whilst another talks of increases in the region of 20 per cent.) maintenance and depreciation, 25 each, S.T.R.