HOW ESTABLISHMENT COST SHOULD BE APPORTIONED
Page 40
Page 41
If you've noticed an error in this article please click here to report it so we can fix it.
Solving a Problem Which Puzzles Many Operators, But, to Which There Is a Number of Solutions Meriting Con sideration
THIS article is going to be full of figures. Because I must be careful to make it as easy to read as possible, if is not going to be easy to write. First to bring down the figures from the previous article. In that contribution, I presented three sets of establishment costs, the first relating to an operator who had three vehicles, the second to one operating eight machines and the third to one who had 15 vehicles.
The totals, per annum, were as follow:-For the 3vehicle man, £477 18s. 11d.; for the 8-vehicle man, £1,122 9s. 9d.; for the 15-vehicle man, £3,004 is. 6d. These are equivalent, per week, to £9 10s., £22 and £60, respectively. Those are, of course, round figures, hot absolutely accurate to shillings and pence, as there is no need for that.
If we assume that these amounts should be divided equally amongst all the vehicles, irrespective of size, capacity, work done, or any other factor, then the establishment costs per vehicle are for the first £159 6s. 4d. per annum, or 43 4s. per week, for the second £140 6s. 4d. per annum, or £2 15s. per week, and for the third £200 5s. 8d., or £4 per week.
• Reckoning with the Load-capacity Factor • Unfortunately, for simplicity, it is not right to divide the establishment costs amongst the vehicles without taking, at least, load capacity into account. It is more correct to deal with these three examples on the following lines.
The first man has three 5-tonners. In his case, therefore, the figures I have just given will stand. His establishment costs are £3 4s. per week per vehicle. As it is important to know what the figure is per ton of. load capacity, 1 will give that, too. It is 12s. 10d. per ton per week.
The fleet of the second man is made up in this way: he has one 7-tonner, five 5-tonners and two 30-cwt. machines. In order to allocate the establishment costs fairly amongst the vehicles of that miscellaneous fleet it is necessary to proceed in this way.
First, find the total load capacity of the fleet. It is 35 tons in all. Next, reckon the establishment costs per ton. As the total of those costs is £22 per week, it follows that the establishment costs per ton of this second of the three operators are 12s. 6d. That means that the establishment costs per week for the 7-tonner are seven times 12s. 6d. or £4 7s. 6d., for the 5-tonners £3 3s. per week, and for the 30-cwt. vehicles 18s. 9d. per week.
Those are the important figures. Note how they compare with the £3 4s. per week for the 5-tonners owned by the first man. There is hardly any difference, notwithstanding that, at first sight, the establishment costs of the first man seemed to be much higher than those of the second operator. The amount of the difference, ls. per week per vehicle, might easily be turned the other way, if the first man he a little more economical with his office expenses or the second man a little more extravagant.
• The Case of the 15-vehicle Man • Now, to take the case of the third man, whose total is just over £3,000 per annum for 15 vehicles. It may be recalled that, in the previous article, I pointed out that this was equivalent to 4200 per annum per vehicle on a flat-rate basis and that it seemed as though this third man's establishment was rather costly. I also stated that, when we went more deeply into the matter, we should find that he was not so extravagant as seemed to be the case.
His fleet consists of two 15-tormers, two 11-tonners, nine 5-tonners and two 2-tormers. The total tonnage is 101. His weekly total of establishment costs is £60, so that his establishment costs per ton are actually 11s. lOid.-say 12s.-less than either of the others. He is, therefore, far from being extravagant, but is actually rather the reverse.
Taking 12s. pet ton, the establishment costs for each of the several vehicles of his fleet are as follow ;—For the 15-tOnners, £9 per week; for the 11-tonners EG 12s. per week; for the 5-tonners, £3 per week, and for the 2-tonners, £1 4s. per week.
It certainly appears, from the foregoing, which, I must again emphasize and repeat, are figures taken from the actual account books of several operators having fleets of about the numbers quoted, that about E3 per week, or possibly a little more, is a fair figure to take for establishment costs of a 5-tonner when assessing the total costs of transport.
Now, before returning to our problem of assessing a rate for the transport of pipes and sanitary ware, I must digress a little and deal with another method of regarding establishment costs. It is the opinion of many experienced operators that the above method of apportioning such costs, whilst correct so far as it goes, does not go far enough.
• "Establishments ": Another Method •
They think that a vehicle should carry establishment costs in some proportion according to the actual work it does. That, at least, is the underlying principle of the method they use. Unfortunately, it does not lend itself to employment in the circumstances in which we now find ourselves.
We are estimating costs, and cannot, therefore, foresee what proportion of the time that any or all vehicles are likely to be occupied during the ensuing year. The method thus advocated can be used only when reckoning what the costs of a fleet have been during a. year just past. For our present purpose we must, on that account, ignore the method. I should like, however, to explain it before leaving this aspect of our problem.
It can be shown, most easily, by example. Suppose that cure vehicle of a fleet is laid up for a couple of weeks. The establishment costs which would, in the ordinary way, be debited to that vehicle, must be put on to the others in the fleet, dividing the amount amongst them pro rata to the work they do, and leaving the idle vehicle free of its load of such costs.
The logic of the metiod is easily seen, Why, say those who use this method of. allocating establishment costs, should a vehicle which is standing idle have to
bear them, since it is not doing anything which involves such expenditure? How the method applies may be seen by taking our operator, who has three vehicles, all alike, as an example.
Assume that, in the ordinary way, each of his three vehicles covers 600 miles per week and that the three earn £66 per week between them. Let us also assume that the weekly operating cost of each is £15. The establishment charges, we have seen, are £3 4s per week, so that the total expense per vehicle per week is £18 4s. That is £54 12s. per week for the three, so that there is a net profit per week of £11 8s.
Suppose ,that, as the result of slackness of trade, one of the three is laid up for a few weeks. The others each continue to run their 600 miles per week and to earn, between them, £44 per week. The operating costs of each is still £15, or £.30 for the {silo. The total establishment charges for the three is three times £3 4s., or 29 12s. That must be added to the operating costs of the two vehicles, so that the total expense per week in connection with those two is, thus, £39 12s. The net profit is £5 8s.
• An Incentive for Better Rates • In the opinion of those who favour this method, it has the effect of drawing the attention of .the operator to the two vehicles which are working, and emphasizing the fact that their earnings are not so good as they used to be, or ought to be. That provides an incentive to go out for better rates for those vehicles.
As is so well known, the more usual procedure is to concentrate attention on the idle machine, loading it with its full amount of establishment costs, and to go out into the highways and byways for traffic at any price with the avowed intention of covering those overheads.
The net result is to earn no profit with the third machine, but to show a loss; the operator is thus directly worse off. In addition, he is preparing the way for a bigger loss in the future, for he is making it likely that he will have to operate the two machines which are in work at lower rates, thus ceasing to make a profit with any of them,
I put this method forward chiefly with the idea of drawing criticisms from operators; if anyone has a comment to offer, will he please let me have it? In the next article I shall return to the calculation of a
fair rate for hauling pipes. S.T.R.