Basic Costing Terms
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THE two reports by the National Board for Prices and Incomes on road haulage rates have re-emphasized the importance. of :osting and at the same time highlighted shortcomings. The Board niggested that comparative information on the relationships )etween costs, turnover, capital employed and profit margin would be particularly useful, especially if related to specific sectors )f the industry and steps are being taken on these lines.
But the Board's final report on road haulage charges also !.mphasized the lack of co-operation with its request for informaion on this subject. It reported it had approached 330 haulage irms for information. About 200 of these had fleets of 20 vehicles 31. more and about 130 were smaller firms. Only 137 question'mires were returned. Some gave reasons for not supplying the .nformation while 150 did not reply at all.
Understandably this response was considered disappointing but as with all such judgment it presupposes the existence and icceptance of a valid yardstick, namely what level of costing ;tandards can be reasonably expected in an industry such as road iaulage. Pertinent to such a yardstick is the fact that 85 per cent )f all public haulage operators in Great Britain have fleets of no tore than five vehicles. Fleets of 20 vehicles or more, as referred o in the Board's report, constitute only two per cent.
Obviously with a fleet of five vehicles or less the business will lot be large enough to carry the overheads arising from costing ;taff specifically recruited for the purpose. In the great majority of :ases the owner driver himself will keep a minimum of records. Throughout the growth of the road haulage industry this limitation )n reliable costing information in respect of a major portion of the industry has been a persistent handicap not only to the operator z.oncerned but also too often to his local competitors.
Whatever the drawbacks from this state of affairs it seems unlikely that there will be any substantial change in the next few years in the pattern of the industry, i.e. 85 per cent with five vehicles or less, even though amalgamations of the larger fleets continues. That being so this limitation of adequate costing will likewise continue. Correspondingly there will remain the need for expositions in the simplest terms of the basic costing theory for the 3enefit of the small operator and particularly the newcomer, Jespite the current trend towards a more sophisticated approach, .ncluding the use of computers, to the problem of achieving ligher efficiency in the larger fleets.
Accordingly I will now briefly summarize the basic terms in 3perating costs. Right at the outset the newcomer may justifiably isk: Why bother to keep any costings, bearing in mind that some )perators do seem to get by without them or, at best, very scanty :.ecords?
There are several uses to which operating costs can be put for the professiOnal haulier. They provide the sound basis on which to Formulate charges while at the same time they are a yardstick by which to measure operating efficiency. Additionally there are several associated advantages in having reliable costings available, such as facilitating decisions as to changes in types of operation so as to raise profitability and in the possible selection of a more appropriate vehicle for the job on hand. An advantage not to be overlooked is that in the very process of keeping records and getting the necessary information, those concerned are made more cost-conscious than they might otherwise be, so giving rise to a new mental approach which could prove of advantage to the operator.
By definition, analysis of a particular subject implies breaking it into constituent parts so as to facilitate their separate examination. But though this latter end may be achieved to good purpose, it should never be overlooked that it is ultimately the whole, rather than the parts, which is of prime importance. So stated this may seem self-evident but it is an aspect that can be overlooked in the enthusiasm for reducing the cost of a particular item.
Means to an end In this same context one should always remember that important though costing is it is a means to an end and not an end in itself. The more sophisticated costing technique becomes the greater is the danger that the whole subject will become divorced from the very vehicles it is purporting to cost.
Time and mileage are basic factors in operating a vehicle. It is therefore appropriate that they should be reflected in the costing of commercial vehicle operation by the division of the total cost into the two groups of standing costs and running costs. Basically, standing costs are related to the time element in operation and correspondingly running costs, as their name implies, are directly related to mileage run. The interrelation of these two groups is a very important element in the ultimate efficiency of operation because the proportion of standing costs in the total operating costs becomes less as the mileage increases.
For more than 50 years, both in compiling the COMMERCIAL MOTOR Tables of Operating Costs and in articles on costing in this journal, it has been found convenient to divide both the standing costs and running costs into five items each, making ten in all.
Dealing first with the five items of standing cost, one of the first expenses to be incurred when putting a vehicle on the road is the excise duty, together with the appropriate proportion of fee payable in respect of a carrier's licence or in the case of passenger operation, the public service vehicle licence, certificate of fitness or road service licence. Where a weekly cost is being estimated the annual amount would be totalled and divided by whatever weekly figure was considered appropriate. In the case of the COMMERCIAL MOTOR tables a 50-week year is considered reasonable so as to allow for two weeks when the vehiclemay be off the road on account of driver's holidays or major overhaul. Obviously if in particular circumstances some other figure was considered appropriate then that would be substituted. Whatever figure is agreed it would apply to all five items of standing cost when a weekly average figure was required and not just to the item of licensing.
Wages are likewise an item which will have to be met immediately and which it has been found convenient to include in standing costs. In theory it could be contended that driver's wages are at least in part, if not in total, directly related to the running of a vehicle. But in practice under modern conditions of employment a driver's weekly wage would have to be met irrespective of fluctuation in the possible use of a vehicle. Additionally while it is possible to include overtime under the heading of running costs, many contend that this refinement in costing is not justified and certainly not for the small fleet operator.
Overtime—differences of opinion Overtime is undoubtedly an item of expenditure which can give rise to differences of opinion as to the best way of dealing with it. Particularly does this apply when an endeavour is being made to arrive at standard costs as distinct from the costing of a specific exercise when all the details are known including the amount of terminal time, mileage and overall working time. Because of increasing delays at terminal points as well as congestion on the roads, the amount of overtime incurred in any one week may often not be directly related to mileage. As a result it is not practicable todevise average amounts of overtime relative to increasing average weekly mileages. On balance, therefore, it is considered more useful to users of standard tables of operating costs to base the amount shown under the heading of "wages" on the basic working week so that to a known amount, overtime relative to their particular circumstances can be added.
Apart from this question of overtime, the item of wages represents the cost to the employer of all expenditure incurred through the employment of a driver so that this amount must also include the employer's National Insurance contributions and any payment under SET where appropriate, together with an adjustment to allow for holidays with pay.
Rent or rates incurred in garaging the vehicle is another item of standing cost as is vehicle insurance: Obviously there will be wide differences in the amount paid for this latter item depending on the insurance cover provided, the area of operation and the particular operator's accident record.
The fifth item of standing cost is the interest charged on capital outlay on the vehicle concerned. Justification for the inclusion of this item is based on the fact that where the operator purchases for cash rather than hire purchase, he will presumably have been previously receiving interest on the corresponding amount of capital invested. Therefore, until his venture into haulage results in earnings over and above that rate of interest, as well as meeting all other expenditure, he cannot really be said to be making a profit.
Because all five items of standing costs are calculated on a time basis the resulting total can likewise be expressed, although the unit can vary, e.g. per annum, per week, per day or per hour.
Calculation of running costs does presuppose that the operator concerned has at least some recording system relative to mileage run, fuel consumed and the labour and materials used on maintenance. It is common practice to express all five items of running costs in terms of pence per mile and, for general purposes, an accuracy of two to three decimal places is considered sufficient.
Fuel cost is obtained by dividing the cost per gallon by the average rate of fuel consumption. But because of the large variation in prices due to zoning, agency discounts, etc., it might be found more convenient to agree on an average price over, say, a three-month period to be adjusted as and when necessary. The cost of lubricants is dealt with in a similar manner.
Tyre costs are obtained by dividing the average cost per set (exclusive of a spare) by the estimated mileage life per set. In making this latter estimate regard has to be paid to the occasional loss of a tyre early in its life due to exceptional accidental damage.
In the context of operating costs, "maintenance" implies expenditure on any work necessary to keep the vehicle in a clean, efficient and roadworthy • condition. This item of cost therefore includes washing, servicing and major repairs. Probably more than most other items, accurate estimates of maintenance cost can only be made on the basis of operational experience in the particular conditions concerned. In the absence of such experience, as would apply to a newcomer, recourse has to be made to standard costs such as those published by COMMERCIAL MOTOR until sufficient experience has been acquired of one's own maintenance costs.
Depreciation is probably the one item of operating cost concerning which there is most difference of opinion as to whether it should be considered as a standing cost or running cost. Or in other words whether it should be calculated on a time basis or on a mileage basis. Exceptional conditions can be quoted when either of the two methods appear to be at a disadvantage. But in what might be termed the middle stream of average mileages and operational conditions, similar depreciation costs would be obtained by. either method. In calculating this item for inclusion in the tables a straight mileage basis is adopted with some allowance for obsolescence when the average mileage is unusually low.
The addition of the standing costs and running costs gives the total operating cost. But the manner in which it is expressed, whether as a total amount, a cost per hour (or other time unit) or as an overall cost per mile, depends on both the time and mileage relative to the particular operation being known.