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COSTING ERRORS, OF BOTH ',OMISSION AND OMISSION

15th November 1940
Page 36
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Page 36, 15th November 1940 — COSTING ERRORS, OF BOTH ',OMISSION AND OMISSION
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Which of the following most accurately describes the problem?

Referring to Some Actual Cost Figures and Showing, by Analysis of Them, What Sort of Mistakes Operators are Likely to Make

IN going through some of the accumulated information which helps me in the process •of revising The Commercial Motor Tables of Operating Costs, I came across the figures which are reproduced herewith in Table I. They purport to be comprehensive figures for operating costs and establishment charges, relating to a small fleet of four vehicles.

They are of interest because they offer an opportunity for pointing to several morals. They provide some actual figures on operating costs and these can usefully be compared with those given in the Tables. They show what establishment costs can be and, finally, they enable me, once again, to point out how easy it is to omit some important item of operating costs and thus obtain a mistaken impression that the 'running costs of the vehicles are low, whereas, in actual fact, the reverse is the case.

This fleet of four vehicles, all of 4-5-ton carrying capacity, is engaged on miscellaneous haulage, mainly over medium to long distances, as is indicated by the fact that the average weekly mileage of each vehicle is 800. The operator maintains a small office in the provdnces, at comparatively slight expense, and his headquarters are in London.

* Outstanding Defect of the System •

The figures given are not those relating to the operations during one specific week. They are not even the result of averaging week by week recordings of expenditure over a period. They are the outcome. I gather, of a simple arithmetical process; expenditure over six months was taken out of the books and the totals divided by 26 to give the cost per week. One of the defects—to which I shall refer— has come of that procedure which, because such faults are likely to be found, is not a satisfactory way of dealing with the subject of transport costs.

If the reader will study• the figures in Table -1 and endeavour to analyse them, he will find that it is possible to extract the vehicle operating costs from the total and to arrive at a fairly accurate conclusion as to the amount expended on various items, arranged according to The Commercial Motor Tables of Operating Costs. The first amount in the second column of figures, the total of £47 2s., is the sum of the vehicle operating costs, all except driver's wages. There is some point in arranging the figures in that way, because many operators like t6 know what their costs are so far; keeping the item wages separate and regarding it, to some extent, as a standing charge, and, to some extent, as a running cost. The total weekly mileage of the four vehicles is, of course, 3,200, and that divided into £47 2s. gives us 3.53d. per mile as the operating costs, exclusive of driver's wages. Adding the amount of these wages, £17 10s., gives us £64 12s. for the 3,200 miles, which brings the figure for operating costs up to 4.85d. per mile. It. is interesting to note that the driver's wages amount to 1.32d. per mile, or 374 per cent, of the total operating costs according to these figures.

• Comparison With Our Costs Tables • The next thing to do is to compare these actual figures for operating costs with those in The Commercial Motor Tables of Operating Costs. They are comparable because the data which we are studying were compiled immediately before the war. .

In Table II are the standing charges. From the difference in tax, 165. as against 12s., it would appear that one or other of the four vehicles must be over the 24-ton unladenweight limit. The average of the four is 16s, per week. The wages paid by this operator are considerably in excess of the figure in the Tables. That is accounted forby the ft that the Tables quote average figures; whereas this operator is paying wages according to a London scale. On the other hand, his expenditure on garage rent is much less than that in the Tables, and that, I gather, is because he. houses his vehicles in an inexpensive building at the provincial end of his principal route.

It is always expected that a haulier's expenditure on insurance will be much in excess of that in the Tables, for the reason which is given in the introduction to The Commercial Motor Tables of Operating Costs. In this, it is explained that the figures in the Tables relate to ancillary user's expenditure, .and the cost of insurance to a haulier is always about twice the amount paid by an ancillary user.

• Reason for Difference in Figures for Interest • The difference .between the two figures for interest is of no account. It probably means that certain of the vehicles were bought second-hand, 'so that the capital expenditure was below the normal for that type of vehicle. On the whole, the total of standing charges is much more than that quoted in the Tables, that being, principally, due to the difference in wages.

The running costs are set out in Table III. There are no outstanding differences between the two sets of items, with the exception of depreciation. So far as that is Concerned, I am of opinion that my friend is making a serious mistake in the way he has assessed depreciation. He has taken, as will be noted by reference to Table I, 20 per cent, per annum as the basis, The vehicles are covering 40,000 miles per annum and in five years that means they. will cover 200,000 miles. They are not of the type of vehicle which can be run for 200,000 miles on medium to long-distance haulage. The_ figure of 0.69d. for depreciation-is more accurate.

It is in conneetion with the running costs, however, that I am able to draw the most important lesson. There is no mention of tyres in this schedule of costs. Now, I imagine that is merely because during the six months under review, it so happened that there was no expenditure on tyres.

, That is the defect of these costs. They do not give an accurate picture of the running costs of the vehicle. Without the 0.48d. per mile, which I have inserted into the schedule of actual costs, it would appear that the running costs of these vehicles total only 2.97d. per mile.

• Small Error Turns Profit Into Loss • To assess rates on that basis, and in that belief, would mean that the margin of profit, if any, was less by one halfpenny per mile than that which the operator provided for in his assessment of the rates he should charge. (Actually, as will be shown, such an error turns the profit into a loss.) I have recommended, time and time again, that the operator should, in all cases, examine his costs and make sure that there is something allowed for every one of the 10 items of operating costs scheduled in the Operating Costs Tables and indicated in Tables II and III herewith. If one of those 10 is abSent, as in this case, then some provision should be made for it.

It may be noted, on comparing the total for running costs, that the actual figures are somewhat less than The Commercial Motor figures, but that if the item depreciation be amended as shown, the balance would lie in the other direction.

It is of interest to note the figure for total costs per mile, including establishment costs as well as. operating costs. The grand total of all expenditure is £79 19s. per week, and that is equivalent to 6d. per mile, almost exactly. Adding an average of 20 per cent. on eost, as being a reasonable net profit, we come to the conclusion that this operator should obtain not less than 7fd. per mile run.

• Actual and Theoretical Deductions • It is of interest to compare actual figures with our

theoretical ones. The average revenue earned by this operator during the six months under review, was £86 4s. per week—only 6.46d. per mile—which means that he is actually earning just a trifle less than 8 per cent, on his costs. The fact that there is, in that net profit, 26 5s. per week, or rather over £300 per annum, may possibly satisfy him. • On the other hand, we have to deduct from that £6 5s., 3,200 halfpennies (to make provision for tyre cost)—that is £6 13s. 4d. Actually, therefore, he is not making any profit at all, or, alternatively; the profit that he has made will have to be spent, sometime in the near future, on re-equipping the vehicles with tyres, for the cost of which no provision has been made.

In any event, a net profit of no more than £300 per annum is insufficient for the operation of a fleet of this size.

It still remains to discuss the establishment costs. The net amount can be obtained by subtracting the operating ,costs, namely, £64 12s., from the total of £79 19s. It is £15 7s. per week. This is of particular interest, as I have always found a difficulty, especially when trying to obtain recognition of the fact that hauliers' rates are insufficient, to persuade other parties concerned that the establishment costs in relation to the operation of a fleet of vehicles, are more than a few shillings per week. When we were arguing sugar-beet rates with the National Farmers' Union, the figure of 10s. per week per vehicle was suggested and regarded by the other side as being ample cover. I have, before in these articles, established the fact that a reasonable average amount in the case of an operator in industrial towns and provinces, is not less than 12s. 6d. per week per ton of pay-load, and that in London 155. per week is the corresponding amount.

• Expenditure on Establishment Costs • Here we have a total of £15 7s. and a pay-load of between 16 and 20 tons. If we take 18 tons, then we have to accept that, in the case of this operator at any rate, his expenditure on establishment costs is 17s. per ton of pay-load.

In accepting that figure we may be making the same mistake in reference to establishment costs as has already been made with regard to running Costs. There may be some serious omissions, and it is, therefore, of interest to check the items of establishment costs against a list which was agreed, after a good deal of trouble, and published in The Commercial Motor dated June 22 last.

It is reasonable to assume that not all the items in that list are incurred by every operator, and there are some which do not probably enter into the experience of the man who compiled the figures in Table I. The following, however, seem as though they should be included. There is no provision for fines, police court costs, and things of that sort. Nothing is allowed for income-tax or bad debts. There is no allowance for expenditure on A and B licences, or for advertising. The item " Subscription to Associations" is also missing.

• What are the Reasons for Omissions go

There may be good reasons for these facts. It m.ay he, for example, that the operator is not a. member of any association. A much more likely explanation, however, is the one which has already been applied to the item of tyres in operating costs. He may be 'h member of an association, but it may be that the subscription has not been paid during the six months under review.

The same may apply to all the other items which I have enumerated as missing from the schedule, and this emphasizes the importance of taking a period of adequate length wheil endeavouring to ascertain what transport costs really are.

One thing is clear. If there be anything wrong with the total of £15 7s. per week for establishment costs, it is that the amount is insufficient, and that is the characteristic of a good many schedules of costs as brought to me by operators. They are incomplete as regards some of the items, and the total is, therefore, an underestimate.

It is never the case that an operator has over-assessed his costs, and that emphasizes the importance of making sure, first of all, that every penny that has been spent is recorded somewhere. Secondly, that in taking a period over which costs are to be checked, to take care that the period is sufficiently long to ensure that, within it, some provision is made for expenditure on eierything within the ambit of transport costs.

The importance of this matter is emphasized by the recent Order that rates increases are to be subject to investigation by the R.T.C. The omission of certain items from operating costs, especially those relating to provision for prospective expenditure, will spoil a really good case. The operating costs are the basis on which rates are assessed; deficiency there is correspondingly serious.

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Organisations: National Farmers' Union
Locations: London

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