Does the Rate Cover the Job ?
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AST week it was explained that whilst operating costs could be said to be incurred in the running of -individual vehicles, in contrast overhead costs arise in the running of a business as a whole, and particularly administration and the selling of the transport service provided. Moreover, though often small and spasmodic, the total expenditure 'involved on the several items of overhead costs can add substantially to an operator's costs. Due allowance should be made for them if his business is to prove profitable.
In the majority of cases the .10 items of operating costs are, relevant to a wide range of vehicles irrespective of the traffic conveyed. Whilst the actual amounts may vary, expenditure on each of the 10 items will nevertheless be incurred.
But, as explained last week, the number of items which will make up the total overhead cost of one operator will vary substantially with those of another. Such variation will result to a large extent from differences in the type of traffic moved and, additionally, from conditions of operation. Thus, where general haulage is limited to relatively shortor medium-distance runs, one vehicle—both collection and delivery—might be sufficient to provide an adequate service. In other cirmcumstances however, even though a similar type of traffic is being moved, the geographical coverage provided by an operator might necessitate additional transhipment depots serviced by local collection and delivery vehicles.
Whilst the provision of such ancillary services has the ultimate objective of ensuring that the long-distance trunk vehicles are fully loaded in both directions, or as nearly so as possible, the cost so incurred cannot be charged directly to the trunk vehicle. Accordingly, other arrangements have to be made to ensure that such costs are accounted for, and the setting up of a standard form of costing for overhead expenditure is a convenient way of dealing with this problem. Superficially a list of overhead costs may seem a collection of miscellaneous items of expenditure. But whilst this may be true of some of the items, the majority of them can be usefully and logically grouped. This then ensures that all aspects of the business involving expenditure on this account have been considered.
As stated last week, eight such groupings might be considered a practical compromise for the purpose of standard costings, although, as indicated earlier, individual operators may wish to add to or delete from this number. The first group—management—was dealt with previously and included two items of salaries and car expenditure. The other seven groups are headed: office, garage and stores, warehouse, branch depots, sales, professional services and auxiliary fleet.
Seven Items in the Group Seven items of overhead -costs are included in the office group. As with all the items in this standard list, they would be varied according to individual circumstances. Salaries would be a major item in this group, whilst some office equipment would obviously be required even for a relatively small organization.
The third item in the office group—rent and rates— would vary not only in amount but according to whether the operator rented property or provided his own. In the latter event repairs aild maintenance to property will also have to be accounted for.
But whether rented or owned the next three items would have general application: lighting and power, heating, and water. To allow for variation in accommodation provided, the seventh item of office expenditure could be headed sundries.
The third group has been termed garage and stores because it is considered that in many cases, the stores, although an essential part of the organization, is such an integral part of the garage that there would be little purpose in accounting for it separately. In larger organizations, however, the central headquarters' stores, responsible for supplies to all depots, might in fact be a separate entity and could be accounted for as such. Under this heading of garage and stores, the same seven items listed under office expenditure could be included. In the case of equipment this may amount to a considerable expenditure, although fortunately many such items of equipment have a relatively long life.
Again, according to individual circumstances, the remarks just made for considering garage and stores as a combined entity for costing purposes might also apply when warehousing, if only on a limited scale, was done under the same roof. But because of the increasing demand by customers for transport operators to widen the service they give by providing such accommodation, a separate
group has been allocated to warehousing costs. The same seven items as listed for the office group would apply.
As distinct from Warehousing strategically located to provide adequate coverage for customers' delivery requirements, the larger transport organizations will probably have one or more branch depots for the housing and servicing of vehicles. Whether or not these happen to be adjacent to any warehouses maintained by the organization, it would be advantageous to keep separate accounts of the expenditure incurred at these branch depots.
A major factor in the success of the road transport industry has been its flexibility to meet the changing needs of trade and industry. But in the very provision of such flexibility there must also be the realistic acceptance that there can be troughs as well as peaks in these trends. Such temporary fluctuations are persistent daily problems which have to be resolved in virtually every transport office. But when they seem likely to become permanent then more radical action is called for.
In the development of a transport undertaking it is a common occurrence for an intermediate stage of expansion to be reached where an operator makes useful arrangements with another operator based near the extremity of the service he himself provides to give a better service to customers and also to provide mutual economies. Alternatively, he might achieve a similar objective, including improved back-loading through clearing houses, agencies or other forms of associations. But when traffic to and from a particular area has increased sufficiently and maintained a stable level, the next stage in expansion occurs when the operator decides to establish his own branch depot in the area. Subsequently, a similar procedure may occur in other areas.
While such expansion is obviously highly gratifying when it occurs, it is vitally important that separate accounts should be kept for the various depots so that their continuing profitability can be checked. Because of the intermovement of traffic between depots, which is a prime reason for their existence, it would be all too easy for one or more depots to be cross-subsidizing other depots unless separate costs were kept for each depot. Because of the relative permanence of a depot, once established, compared with vehicles which can be readily moved from a declining industrial area to a More prosperous one, there will be an understandable reluctance, should the occasion arise, to close a depot. But unless proper accounts are kept the operator may well not be aware that the occasion has in fact been reached when it would be advisable to do so.
As emphasized in this series the selling of a transport service is just as important to a transport operator as the selling of a commodity is to a manufacturer. But, unfortunately, this fact is not always recognized as such and in many transport undertakings the sales organization is inadequate, or virtually non-existent. As mentioned last week many changes may take place in the near future in the allocation of traffic movement in this country as between the various forms of transport—for example, road and rail. Some changes are the declared objective of the policy underlying the plan for the re-shaping of British railways. The ultimate findings of the Geddes Committee on goods vehicle licensing can also influence the present pattern of traffic movement. It is therefore more than ever necessary for road transport operators to at least ensure that their own house is in order as far as the selling of their service is concerned. The stiffer the competition may be in the future the more necessary it is that an operator's existing and potential customers should know the extent and quality of the services he provides.
Five items of overhead costs are listed in the sales group. Where the organization is large enough these will include representatives' salaries and commission and, in addition, their car expenses. Because transport is such an integral part of manufacture and subsequent distribution, it is essential that sales representatives or canvassers employed by transport operators should not only be familiar with the services his organization provides and the rates charged, but he must also be familiar with the special requirements of each type of traffic, including the problems of loading and other internal problems which could affect services.
This review of overhead costs will be concluded next week.