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More Overhead Costs

15th October 1965
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Page 94, 15th October 1965 — More Overhead Costs
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Which of the following most accurately describes the problem?

LAST week a start was made in considering the several items of expenditure which fall under the heading of overhead or establishment costs. Whilst the actual cost of operating a commercial vehicle can conveniently be divided between standing costs and running costs, there remains a substantial number of items of expenditure, many of which may be relatively small in amount but, in total, add appreciably to the overall expenditure. Whilst standing and running costs are directly incurred in relation to the operation of specific vehicles and directly—or very nearly so—in relation to the time involved and mileage run, overhead costs fall into a different category. Briefly, they can be said to be incurred in the running of a business as a whole.

The number of items of overhead costs and the total amount of expenditure thereby incurred will vary not only in relation to the size of the operator's fleet, but substantially relative to the type of operation. In this latter context a parcels operator or a private-hire contractor in the coaching business may well be involved in considerably more administrative work than a mediumor long-distance haulier who is fortunate enough to be engaged in moving

substantial and regular amounts of traffic from a limited number of customers.

This possibility of substantial variation in the number of items of overhead costs as between one operator and another is, of course, in contrast with operating costs where the standard 10 items apply, whether one or 100 vehicle.s are involved. As a result, it is not possible to have a set procedure concerning overhead costs. Nevertheless, it is useful to check one's own records of overhead costs to prevent possible omission.

Accordingly, it is convenient to group the several items which fall under the heading of overhead costs despite their spasmodic occurrence. Last week some items of overhead costs were considered under the headings of management, office, garage and stores. warehouse, branch depots, sales and professional services.

Auxiliary Fleet

Continuing with this consideration of overhead costs the next group arises in operating an auxiliary fleet. In most transport Fleets of sufficient size to justify a maintenance depot a system of preventive maintenance is practised. Although in recent years there has been criticism of such systems when applied too comprehensively, largely this has been criticism of excessive maintenance rather than of the principle of preventive maintenance, in the final resort most operators would choose to do their repairs at scheduled times to suit their convenience, rather than at unscheduled times dictated by breakdowns.

But if a preventive maintenance scheme is to be practised whilst at the same time the service provided to customers is not interrupted, then in most cases spare vehicles will have to be available to replace the normal service vehicles undergoing their routine maintenance. In effect, the cost of operating such spare vehicles is a supplementary service to the business as a whole and as in successive days and weeks they will replace all the service vehicles, the cost of operating the spare vehicles cannot be attributed to any one service vehicle. It is therefore a convenient procedure to include the operating costs of these spare vehicles under the heading of overhead costs. The actual cost of running the spare vehicles will be recorded in the same way as with the service vehicles, with the usual division between standing and running costs, but the total operating cost will then be entered under the group heading of overhead costs — auxiliary fleet.

"Maid of all Work"

In this auxiliary fleet, in addition to any spare vehicles, there will also be the inevitable "maid of all work -the service van or vans in larger fleets). Although the actual mileage run by such a service van may not be high, its immediate availability is a vital factor when dealing breakdowns, securing spare parts in short supply and, Kcasions, transfer of personnel.

There the size of a fleet justifies the outlay, and particuwhere the heavier type of haulage vehicle is included he fleet, an operator may have his own breakdown ■ very vehicle. This may not necessarily be a new cie specifically purchased for this purpose. Many ntenance repair staffs are more than capable of coning one of their ageing haulage vehicles for this purpose gatively low expense. Nevertheless, the cost of operathis vehicle needs recording. even though they may be ely standing costs to ensure that the vehicle is avail, whether in fact it is used• or not. Once again it is venient to do so under the heading of overhead costs.

rtail Paper Work

espite the eight groups so far dealt with, there still ains a number of individual items of overhead costs :h are unrelated and accordingly need to be dealt with LrateIy.

pplicable to several of the groups already mentioned-e, garage and stores, warehouse, branch depots and be the inevitable use of stationery in one form mother. I mentioned earlier that however much an ient operator may curtail paper work to the absolute innum for the successful running of any business, it will upplemented in the case of the road transport operator the necessity to comply with statutory regulations :ming the keeping of records. losely allied to the item of stationery will be the cost ,ostage. Unfortunately this expense, like many others :h the operator has to meet, has been increasing in nt months with a further increase in postage rates May. ut because of the urgency of transport operation :rally a much greater expenditure will be incurred in ,hone charges. With the operational unit—the vehicle ievitably disposed throughout the locality, if not the atry, the proportion of total expenditure incurred in Atone charges will be higher than most other businesses. ;onfirmation of this situation_ the larger operators find vorth their while to have more sophisticated means ornmunication such as teleprinter and radio control. these charges and costs could conveniently be grouped er the item of "telephone and communications ".

Yvement of Personnel

inder several of the group headings already mentioned vision has been made for the inclusion of car expenses ;onnection with management and sales. Additionally, :r travelling expenses could be incurred on public sport and possibly in reimbursement of employees for use of their private cars. These expenses may well ncurred in the movement of personnel_ Such movement might arise when a change-over system is in operation and it is necessary to relieve drivers on completion of their statutory periods of work. Alternatively, vehicles may be delivered or collected from other depots or distributors after major repair or initial purchase.

Ways and means of improving the image of road transport have been much in the news lately. Whilst this is currently under review relative to the industry as a whole, many well-known companies have already considered it worth their while to supply drivers and other personnel with uniform. Whilst this has been common practice for many years in passenger vehicle operation, its application to goods vehicle operation is increasing. Accordingly, provision has to be made for the inclusion of this item of expenditure in the ultimate charge rendered to the customer.

Another item of expenditure can arise from the use of loading equipment. Admittedly the item of equipment has already been included under the group heading of garage and stores and warehouse and branch depots, and this may include loading equipment. However, there can be circumstances where a particular type and volume of traffic justifies the operator having available mobile loading equipment which can be taken out to a particular site to facilitate loading or unloading. An example would be during a sugar-beet campaign when a haulier may have to 'uplift a substantial tonnage of beet stacked at strategic points by the farmer. Where this does apply and the equipment is not otherwise used, an appropriate item has to be included in overhead costs.

Probably more so than in other industries, it is particularly important that road transport operators--both passenger and goods--should be well informed of current events, both locally and at government level. As with other businesses, naturally they must be expert in their own field of operation. But additionally because their industry is so regulated by statutory requirements, they must be fully acquainted with existing legal requirements and, if possible, be forewarned of any proposed new regulations.

Except in the very largest concerns where it would be economic to have some official or department specifically detailed to keep abreast of such developments, the only way in which a small or medium-sized operator can do so is by regular reading of the trade Press. It is not generally realized what organization and expense is required to provide the national coverage which such trade journals consistently provide in all aspects relative to the operation of commercial vehicles. Accordingly, the annual subscription to such a journal could be included as an overhead cost.

Supplementing such sources of regular and authoritative information would be the advice obtainable from an operator's appropriate trade association. For the professional haulier this would be the Road Haulage Association, whilst for the ancillary user the Traders Road Transport Association would be the appropriate body. The independent passenger operator would similarly find it advantageous to join the Passenger Vehicle Operators Association. Here again, the advice obtainable from these associations would be invaluable to small operators, especially as such information is so highly specialized that it is not regularly obtainable from any other source, excepting the appropriate trade journal, or by those—very much in the minority--who have both the time and expertize to obtain, read and above all understand the innumerable Acts and statutory instruments which govern road transport operation in this country. Although parking, weighbridge and ferry dues are strictly operational expenses, probably it will be found inconvenient to allocate these small amounts to specific vehicles and accordingly provision can be made to include them in overhead costs.

Accountancy Procedure Whilst the principle of dividing vehicle operating costs into 10 items under the two groups of standing costs and running costs is accepted as standard procedure by many operators, various practices may apply in accountancy procedure as applied to the business as a whole. This will be dependent on the individual preferences of the accountant concerned, the fees for whom, incidentally, have already been provided for in overhead cost under the heading of "professional services" where the operator is not in a sufficiently large way of business to employ his own accountant.

Because of these possible differences in accountancy procedure, additional items of expenditure will still need to be provided for and in the absence of other means, they could be included in overhead costs. Just as interest on capital, insurance, maintenance and depreciation relative to specific vehicles are included in operating costs, these same four items, and possibly similar expenditure, need to be recorded in respect of equipment and buildings.

Equitable Proportions

As mentioned earlier, there can be a substantial difference in the number and amount of overhead costs relative to the type of operation. Despite this comprehensive list there will be several specialized types of operation where other expenditure is incurred and accordingly must be added to the list.

But even when the list is complete and all expenditure is recorded there remains the difficult and to some extent contentious problem of determining equitable proportions of total overhead costs to be allocated to specific vehicles, or at least to particular groups of vehicles. It will be appreciated, incidentally, that for the purpose of rendering charges to the customer, overhead costs cannot be allowed to remain as a total expenditure but must be allocated as fairly as possible to the total work performed.

Extent of Operation

To some extent by definition overhead costs comprise expenditure which cannot specifically be identified directly with the operation of individual vehicles. But that is not to say that they are totally unrelated to the extent of operation. Thus, a vehicle averaging 1.000 miles a week normally would incur more expenditure in respect of several of the items of overhead costs—traffic office administration and telephone charges would be obvious examples —than one doing similar work but averaging only 500 miles a week.

On the other hand, some overhead costs do remain static regardless of mileage. Therefore, to make allowance for both these aspects when compiling The Commercial MowsTables of Operating Costs, a percentage addition is made 'to the total operating costs, which in effect is both A percentage addition to the standing (or fixed) costs and the running (or variable) costs. Individual operators may also adjust this allocation of overhead costs according to differing types of work undertaken within the same fleet.


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