Keep Depreciation Simple
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Immediate Costs May be Looked Upon as Total Expenditure by Unwary Operators, So That No Provision is Made for Replacements
OF all the 10 items of operating costs, depreciation is probably the one which causes most difficulty to both newcomers and established operators alike. Newcomers either have only a hazy understanding of it or ignore it completely.
Rightly used, the many forms of hire-purchase and creditfinance facilities now available are of substantial assistance to a wide range of users. It is unfortunate, however, that the possession of a new vehicle can make it easier for the inexperienced operator to overlook those items of nonimmediate expenditure, such as major repairs, new tyres and, above all, ultimate replacement of the • vehicle. In that event, no funds will have been accumulated and further capital outlay will be required from other, sources if the user is to remain in business.
• Unfortunately, any such difficulty will not necessarily be confined to the one operator. There is every passibility that, throughout the period when the original vehicle was in use, the rates which the operator had been quoting to his customers will have been inadequate to provide for his real costs and leave an adequate profit margin. Although he may not have been deliberately undercutting his competitors, he will undoubtedly have done so. In such cases the trouble really stems from the operator's inability to keep and maintain adequate records of both immediate and deferred expenditure. In the absence of such records the immediate costs are looked upon as total expenditure.
Moreover, experienced operators who fully appreciate the importance of making proper provision for depreciation costs hold different opinions about how they should be calculated. tiasically, all 10 items of operating costs depend on either time or mileage, resulting in the appropriate division as between standing and running costs.
As regular readers of this series of articles will be aware, depreciation is normally calculated here on the basis of mileage, and this principle is adopted also in compiling " ' The Commercial Motor' Tables of Operating Costs." After consideration of alternative methods, calculation by mileage was considered the simplest and most generally appropriate to the normal operation of the various types of vehicle dealt with. It is not, however, claimed that this method A sense of perspective must always be maintained when considering the adoption of any particular form of recording or costing. Accuracy must always be a principal aim, but there is a limit to which the additional work caused by more complicated systems is justified. It is on this score that some of the more elaborate methods of calculating depreciation are impracticable for most road transport operators.
Nevertheless, it is important that operators should have some knowledge of the simpler alternatives in calculating depreciation. This particularly applies where the time element• in work is high, relative to the mileage covered, such as in many kinds of tipper work or seasonal coach operation.
Even for normal operation, however, some users contend that they prefer to deal with depreciation on a time basis. This does not necessarily invalidate the mileage method. In fact, when applied to normal average mileages and operating conditions, the results obtained by either of these two methods may turn out to be similar, if not identical, because the extent of usage virtually coincides.
Where vehicles are regularly operated, the weekly and annual mileage tends to be similar, one week or one year with another. If, for example, a vehicle averages 600 miles per week, it is immaterial whether one depreciates over a five-year period or on 150,000 miles. When the word " year " is used in this sense, there is invariably a mileage implication. Thus, in this connection there would be no relationship between a year's operation of an eight-wheeler on trunk service and the corresponding period of use to which a trader may put his small van employed on local work.
Mention of the small van employed on retail delivery introduces another factor----obsolescence. As with some types of
coach and car hire, the competitive conditions of trade, together with the high advertisement value attached to the vehicle's appearance, may necessitate replacement much sooner than would normally be justified on the basis of physical depreciation or uneconomic operation. The same applies to other types of commercial vehicle where the average mileage is exceptionally low, although the incidence -of obsolescence will Probably not be so severe. In this case it is brought about by the long period the vehicle would have to be -in. service in order to aggregate the total mileage which would otherwise have been considered to be a reasonable estimate of its life.
Whilst exceptional circumstances may cause some adjustment of the method used to calculate depreciation, it is virtually implicit that they would be individual to each operator, who alone •would have the information necessary to make the appropriate estimate, It is not strictly true to claim that depreciation depends on the economic life of a vehicle, as this can be conditioned to the use to which a vehicle may be put. It is common practice, for example, for fleet users to demote, periodically, groups of vehicles from one use to another. Vehicles formerly on long-distance work might be transferred to medium-distance or local duty if they were not in the maximum weight capacity, whilst passenger operators, in rural areas at least, might transfer vehicles formerly employed on coach work to local bus services.
Cumbersome Calculation
In the case of the passenger operator, although calculation of depreciation on a time basis might well have its use when applied to spasmodic coach operation, it might be cumbersome to revert to calculation by mileage when the same vehicle was transferred to other work. For the small user, at least, such complication would be hardly justified, so long as the main objective of providing suffiCient funds for a replacement vehicle at the appropriate time was achieved.
There may also be another reason why calculation of depreciation on a time basis is adopted by some users, and especially C-licensees, In these instances, they find' it convenient to do so to keep in line with their companies' methods of dealing with this item of expenditure in their main business. Alternatively, it may be expedient to tie, tip with income-tax calculations and allowances.
At this stage, it should be remembered that the basic purpose of commercial-vehicle recording is to enable the user, whether he be a professional operator or C-licensee, to ascertain his own costs and subsequently make an appropriate charge where necessary. Particularly where rates have to be quoted, it is necessary for commercial purposes to be ableto offer a comparatively stable rate which need be changed only as prices or costs, outside his control, vary.
It would be both impracticable and more complicated to try at yearly intervals to reassess the current values of vehicles and to readjust costs of depreciation accordingly. If that were done a different rate would apply for virtually'the same service offered to the customer, albeit with a slightly older vehicle.
Having Repercussions
The growth of. quantity production, and its increasing application to commercial vehicles, is also having repercussions on vehicle costing in general and the item of depreciation in particular. Obviously, maintenance and depreciation are two items of operating cost which are closely related, whether the vehicle is quantity produced or not. The wider range of quantity-produced vehicles is, howeyer, necessitating some reassessment of the relative values of maximum availability or vehicle life.
Particularly in the case of 'ancillary users, where financial resources can be made available if it can be shown that they can be put to good use, it may well be that the provision of adequate maintenance facilities will extend the life of the vehicle and lower the cost of depreciation. To achieve that end, however, the cost of maintenance may be increased. although not necessarily to the extent which depreciation could be decreased.
The third factor of availability of vehicles for service could well be of even greater importance, although in many otherwise well-kept recording systems its significance can tend to be obscured. This is because its effect is negative rather than positive. Whilst there will be no addition, to the total operating cost, there will be an increasing loss of revenue as the periods of non-availability become longer, resulting from an extended programme Of major overhauls.
This aspect of depreciation affords a good example of the inter-relationship of all 10 items of operating cost. Whilst it is natural, when considering ways of reducing individual items of cost, that efforfs should be concentrated on that sphere of operation, the repercussions which any proposed change may have on other items of cost cannot be ignored. S.B.