What are Operating Costs?
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Essential Information for All Concerned in the Road Transport Industry: Newcomers May Not Fully Appreciate the Incidence of Certain Expenses, Particularly Those Recurring at Long Intervals : Methods of Reckoning Depreciation
NO one can tell exactly how much a vehicle is going to cost unless accurate information is available as to the kind of work it is going to do, the attention it ,.% ill receive and the conditions in which it will operate.
The problem is a little easier if the inquirer is concerned with the cost of a vehicle which he already 'owns and is using. In that case he ought to know his expenses better than I do. All that I can do is to refer him to "The Commercial Motor' Tables of Operating Costs."
These Tables would not actually provide him with the answer, They do, however, afford a guide. They give an idea as to what the vehicle should cost and, given average conditions, are sufficiently accurate for him to use as a basis for quotations.
In practice, his results may differ quite substantially from the figures in the Tables. The best use of these Tables is as ,a guide, not only to the probable operating costs of existing vehicles, hut the right method of ascertaining them. The way in which the Tables are arranged is, in itself, an indication of a proper system of collating costs.
The reader should note that the first essential is to separate the items of cost into two main groups; one, of running costs, relating to expenditure which varies directly or almost directly in accordance with the distance the vehicle is run; the other, standing charges, items of expense which do not vary so much and which remain practically unaltered week by week.
Importance of Mileage
That is the basis of these Tables, but there are other things of note. Importance attaches to the distance covered per week by a vehicle. A glance at the Tables will show that the cost per mile decreases as the weekly mileage increases, so that if the cost per mile is important in any particular business, to cover a maximum of useful miles per week is obviously a matter of moment.
If, on the other hand, the cost per week is the standard by which economy is judged, the fewer mites covered the better, provided that the utility of the machine is not diminished.
Another point which emerges from the study. .of these Tables is that in a business where vehicles are used for carrying other people's goods, it is necessary to bear in mind that the haulier has expenses other than those directly concerned in vehicle operation. These expenses must be c30 taken into account before he can arrive at a fair charge to make to his customers.
Those who run vehicles for the carriage of their own goods have similar extra expenses, but they are not quite as high as those of a haulier. The haulier's costs in this connection are lower per mile or per hour because he runs many more miles per week than a C-licensee.
A detailed explanation of the meaning of the items of cost is, perhaps, not necessary these days when nearly every operator is aware, or should be aware, of the way in which money has to be spent in order to keep a vehicle in good order. There are, among the running costs, obvious items such as petrol or oil fuel, lubricants and tyres. Not so clearly defined in the mind of the newcomer, the layman of the industry, perhaps, is maintenance, and it may be as well to expand that term in explaining that it refers to one big item and a large number of small ones.
The large account is the overhaul of the vehicle as and when necessary. The smaller ones are the minor attentions which every vehicle must receive, such as decarbonization, tappet adjustment, cleaning-out of crankcase, and so on. Then there are sundry small items too numerous to mention
and not amounting to a great deal, even in the course of a year of use. They are, however, not to be lost sight of in any system of accounts which pretends to be complete.
Depreciation is the-equivalent of the .slow but definite decrease in value which every motor vehicle undergoes. The standing charges need even less explanation than the running costs. Licences, the levy, wages, rent and rates of garage, and insurance are all matters with which users and most prospective users are familiar...
The one remaining item to which I must draw attention is what might be called a negative expenditure—" interest." It represents the money which would be earned if the capital sum spent on the purchase of the vehicle were to be carefully and safely invested.
The foregoing, then, are the items of the Tables and their meanings. Of all the items of running cost, maintenance is, perhaps, the one which varies most from operator to operator. There is, for example, the type of operator who believes in preventive maintenance which, in the wrong hands, may soon become unnecessarily expensive.
At the other end of the scale is the man who believes in letting well alone; he waits until the last moment before he
gives any attention to the condition' of his vehicles. His maintenance costs are like his method, unpredictable. One thing is certain; if the amount spent on maintenance is skimped, the rate of depreciation will most certainly be accelerated.
Depreciation is one of the most controversial items: not only is there a difference of opinion as to the way in which depreciation should be calculated, but there are two schools of thought concerning its proper allocation in a schedule of operating costs—whether it should be regarded as a running cost or as a standing charge.
My view has always been that it should be regarded as a running cost and, as the reasons for bolding that view are fairly clearly defined, it may be as well to commence by stating them. Depreciation of a vehicle depends upon its use and not upon its age. In that respect it differs from the depreciation of a private car, the market price of which always turns, to some extent, on the date of its manufacture. The useful life of a commercial vehicle can thus be reckoned in miles.
In the case of a good machine, 130,000-100,000 miles can be regarded as its probable useful life. Low-priced machines, not designed for longevity of service, bring down the average, as does misuse. Generally speaking. the actual life, other things being equal, is more or less in proportion to the first cost, with a distinct bias in favour of the highpriced article. In the Tables, about 150,000 miles is the figure usually assumed as a basis for-calculating depreciation of low-priced vehicles.
Those who prefer to regard depreciation as a standing charge arc not so closely agreed upon their reasons, or upon the precise method of its calculation. The most cogent reason for one of the methods, so far as I can discover, is that the Inland Revenue authorities prefer it to be so calculated for the purpose of income-tax returns, and users, having to calculate it that way, prefer to continue to do so 'and thus save themselves the trouble of entering the item twice. I consider that there is much to be said for that attitude.
Others regard depreciation as a standing charge because,
for convenience of accountancy, it is better to have the items of running cost as few as possible. This is a point of view which is being favoured more and moie. by haulage contractors who find that they can thus the more readily make use of the time and mileage system of assessing charges which is provided for in the Tables.
If that method is used, each vehicle is debited with a regular charge per hciur; that charge being made up of all the standing charges, overheads and a minimum profit allowance with an amount for running costs.
If it is agreed that depreciation be regarded as a standing charge, how should it be calculated and what percentage of the value of the -vehicle should be taken as last each year? The Inland Revenue officials take 25 per cent, on the failing value of the vehicle. That is to say, they calculate that 25 per cent. on the depreciated value of the vehicle as it stands in the operator's books at the beginning of the financial year.
Falling Value
A vehicle which, new in April of any year, has cost 11,160. loses £290 in value in the first year. At the beginning of the second year it is taken as being worth 1870 and loses 15 per cent, of that, which is £217, and so on through its life. Others prefer to reckon on the vehicle having a life of eight years. They assess depreciation, therefore, on a flat rate of 12-1 per cent, per annum, and on a vehicle costing 11,160, less-tyres. making it £1,000, the amount is £125 each year. County councils and similar bodies reckon depreciation at the rate of 10 per cent. per annum on the depreciated value of the machine, year by year. That gives the vehicle a much longer life than is customary in commercial service but is justifiable on two grounds. First, the vehicles are usually maintained more carefully and, secondly, the annual mileage is low. The results of calculating depreciation according to all these various methods are shown in the two tables which accompany this article. The cost of the vehicle when new is taken to be £1,160 or 11,000 net after deducting the cost of a set of tyres. That deduction should be made in all cases except when the amount has to be considered in respect of income-tax returns. S.T.R.