SOLVING THE PROBLEMS OF THE CARRIER
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The Risk of Overlooking Important Items of Cost. An Argument in Favour of Making Depreciation a Running Cost IHAVE often pointed out in these articles how easy it is for the haulier to overlook some important item of expenditure and thus make a mistake in his costs, with the result that, quite innocently, he cuts rates and operates, if not at a loss, at least on terms which fail to show him a profit. Indeed, one of the reasons why I am so insistent on hauliers following a certain welldefined scheme in calculating their costs is that I believa that only in this way can the risk of error be diminished.
I discovered the other day that there is actually a loophole: that even the careful haulier, who makes a note of all his items of expenditure, broadly on the lines which I recommend, is still liable to make a Mistake of this kind. I was examining the accounts of a haulier and, secretly, I was inclined to the view that his cgsting system was most thorough.
On broad lines, the system he was using was that which I recommended in a series of articles published at the commencement of this year. Incidentally, this series appears to have been particularly valuable. I have had many requests for back numbers of the issues in which it appeared and, in more than one case, I have had to take with me a complete set of cuttings and lend them to a haulier' for an hour or two, This particular haulier sets out first his standing charges and establishment costs, which, for his half a dozen vehicles of varying sizes, total approximately 21,000 a year. The total of establishment charges he divides aniongst the vehicles pro rata to their load capacity, which is the conventional procedure. He then totals the standing charges for each vehicle and, adding to that sum, a proportion of establishment costs, obtains .a. fixed charge per annum for each vehicle.
He keeps separate note of his running costs and wages. The latter cannot be included in the standing charges, B44
as they vary from week to week, largely as the outcome of working a fair amount of overtime. Each week, by adding the proportion of fixed charges to the actual running costs, he obtains the cost per week for each vehicle. He sets by the side of that result the total earnings of that vehicle and is thus aware, week by week, how much each machine is earning.
The haulier has had the system in operation some five or six months.. He estimated his establishment costs to start with, but as a check was keeping a careful record of them in a book set apart for the purpose. When I had examined the accounts generally and expressed myself as being without criticism of any consequence, he said: "But, look here, I'm about 2200 out." He turned to the book in which he kept a note of establishment costs. "The total to date here is 2215 es. 8d. Now, according to the standard to which I'm working, I've got 2427 2s. 9d. debited as fixed charges."
For a moment I was puzzled, and then I realized what was happening. "But your total of fixed charges set down against the vehicles is more than just establishment costs," I exclaimed. " It includes, for example, the tax and, in your case, depreciation." " Oh! I see," he said. " Well, that's at once a relief and a blow. It's a relief because I thought there was something the matter with my accounts and it made me very uneasy. It's a blow because I thought I had that 2200 to spare—a kind of extra profit—and I had nearly reached the point of making up my mind what I was going to spend that on."
And so, with a laugh, the incident terminated. But it was quite clear to me that if I had not, quite fortunately and by chance, come upon the scene at that time, he would have concluded that it was merely his estimate of establishment costs that was exaggerated and that he really had £200 to spare. If a man who keeps careful records can make a slip like that, how much more likely is it that a haulier who keeps no account is going to make mistakes of the same kind.
There is another lesson to be learned from this haulier's methods. I have already remarked upon the fact that he included depreciation of his vehicles amongst the standing charges. Now, I have often pointed out that there is no hard-and-fast rule as to whether depreciation 'should be regarded as a standing charge or a running cost. So long as the haulier makes proper provision for it—and that is essential—it does not matter how he classifies the item. I prefer to regard it as a running Cost.
I do so because I have always found that this method is more convenient for the purpose of the haulier, which is to ascertain in a simple manner the actnal cost of operation at any tirae and to be able to arrive at an accurate picture of the state of the'haulier's business.
The wisdom of my method was exemplified in this
particular case. At this period of the year there arrives, for haulage contractors engaged in the class of business in which this man was interested, a slack time of a month. or six weeks and, checking the progress of his business week by week, matters did not appear in too rosy a light. The mileage covered by each vehicle was considerably below that current during the profitable months of the year.
As, however, his depreciation item is fixed, it appears that, during these comparatively slack weeks, his profit is almost negligible. Now, if depreciation were treated as a running cost, its amount would, of course, rise and fall in proportion to the mileage, so that in a week when the mileage was low, the depreciation item, too, would be low and affairs would not appear to be so serious.
This criticism applies equally in the contrary direction. When the mileage is fairly high, depreciation is still fixed and, comparatively, low. Since, however, earnings are approximately in proportion to mileage, the ,profit seems high; actually it is less than appears to be the case, according to the books. There is a tendency to be too optimistic during busy periods, thus engender
ing a feeling that, perhaps, in case of need, a cut in rates could safely be made. On the other hand, when business is slack, there is a tendency for the haulier to become alarmed and then to cut rates, so as to obtain more business and thus increase his mileage.
A. similar difficulty arises in connection with the recording of expenditure on tyres and maintenance. The principle involved is somewhat different, but the effect is similar. This particular haulier prefers not to debit his vehicles with a fixed amount per mile for tyres, but rather to enter actual expenditure as it occurs. The result is that when a vehicle is equipped with a couple of new tyres, or when it is repaired, the revenue for the week is less than the expenditure and, so far as the books show, it appears that the vehicle, for that week, has been run at a loss.
There was a particular case which exemplified this aspect of the matter, inasmuch as one of the vehicles had engine trouble one month, involving a debit of some £.20. If the principle of allocating a fixed amount for maintenance per mile had been adopted, that item would not have alarmed the operator so much as it did in that case. His current weekly accounts would not have shown that item, but only the appropriate allocation of maintenance, according to the mileage, which, as the mileage was low, would have been less, instead of greater, than usual. This method spoils that " true picture" which I think a haulier's accounts should always aim to display. S.T.R.