Keeping Track of Costs
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Our Costs -Expert Explains His Methods for the Benefit of a Small Haulier and Discu-sses the Reckoning of Establishment Expenses TALKING recently with an operator who had purchased a copy of "Cost Recording Made Easy," he inclined to the view that to complywith the recontMendations in the book was going to take up too much time and not be worthwhile. This haulier had three vehicles and came to sec me to discusscertain problems arising out of the cost recording methods recommended in that book.
: He was trying to keep records in the "way I suggested, taking his figures from "The Commercial Motor" Tables of Operating Costs for the estimated expenditure on tyres, Maintenance an depreciation.
: When planning the system. I 'desired to 'make it possible for the small operator, lacking any experience in cost recording.. to become aware from the commencement of keeping these records what his "costs were and what his methods should be to make a profit.. I • have always eMphasized. however, the importance of keeping data of actual -costs, so that as time goes on the thierator can check his -. actual expenditure against the 'estimated 'figures embodied in the Tables. It is for that reason that columns are included in. the record analysis' sheets for estimated ffgures for cost of tyres and maintenance and for the actual exienditu're in relation to those items. .-.Dq you regard it as necessary." he asked, "to keep separate accounts of expenses incurred in connection with
each' of my three vehicles?" ... ,
"I do, certainly, because only in that way can you ensure thp,..,:each vehicle is doing its fair share, is being' properly coated: and is not actually costing more than it should?' I sMil::: ' •
"I thought you would say that," he said, 'and actually I must admit I agree with you. I have had some experience of one vehicle being a 'passenger,' and that can be avoided only by keeping a check on the cost of each machine. My trouble is that I find it difficult to separate the items and debit each to the appropriate vehicle. For instance,a driver will be out with a vehicle and will have to pay for some maintenance work to be done. He finishes the job, comes back and does not make a record of it.
Particular Disbursements
"Next day he is out with another vehicle and possibly the day after that has another change or, maybe, is back on the first vehicle again. It is only at the end of the week, when he puts in his expenses, that he remembers having made this particular disbursement. Unfortunately, he cannot recall exactly which day it was and he cannot say for which vehicle."
" But surely each driver reports daily when he returns what has happened during the day and would be likely to mention any unusual expenses of that kind? " I queried.
"Well, no," he said, " it is not quite so simple as that. Having only three vehicles. I cannot afford a manager. The work we do is of such a nature that one driver may be out from early morning and finish his day's work in the middle of the afternoon. Then there may be an urgent order to be executed at once, which means that that same vehicle must go out again.
This happens fairly frequently, but not often enough to justify the wages of a spare driver. I must take the lorry out and do the job. While I am away, probably the other two drivers come in, put their lorries up for the night and, seeing no one about, go home, deciding that they will report the next time they see me,
"I may have been out all night on the work which necessitated my taking over the lorry, consequently, when the men arrive in the morning for their day's work, I am
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in bed. It is that kind of thing which has got men into the habit of being lax in making their reports and has Madeit, as things are, impossible precisely to alloeate expenses to each vehicle."
The difficulty can be overcome quite easily," I said. "One thing none of your men can avoid is the need for
completing a log sheet for each day's work. You can purchase log sheets on •which there is spaceprovided-for entering petrol or fuel oil used, oil consumption and any other expenses incurred by the driver. " Every .logsheet must bear a reference to a specific vehicle and, if you use log sheets set out in that way the informatia will tome into your hands automatically." " Thank you," he said. "that method Of dealing with The problem had never occurred to me. But there is something else. I cannot find how to keep tyre cUsts separately. Here, the fact that my 'three vehicles are all of the same type and use the same make and size of tyre is'the. trouble. The tyres are interchangeable and if the driver of any vehicle uses a spare tyre during the -day becauseOne of the tyres on the vehicle is in need of attention, he may at night do either one or other of these two things.
Impossible to ebeck. Costs: "He may forget allabout it and go out,neXt day with his Punctured spare tyre, or he may drop the defectiye equipment in the garage, leaving it to be repaired, and fake a stock tyre for use as a spare. That means that any tyre mayhe -en any vehicle, and So it becomes impossible to check tyre costs so far as they relate to individual machines."
" Who sees to the repairs of the damaged tyres? " I asked.
"1 do."
"Then it is up to you so make a record of the change on the simple tyre record card which is shown on page 9 of the book, You will note that each card provides Means for recording the history of a tyre from start to finish."
" But that is not of much use to me, is it?"
"You evidently have not studied this part of the book on cost recording," I said. "If you had you would realize that although each card provides for the full story of the life of a tyre from the first time it is put on a vehicle until it is scrapped, it also enables the cost of tyres pervehicle to be assessed."
" As a matter of fact," he said, "I looked at that card and it seemed such a mass of figures all in connection with one tyre only, that I thought it was not worthwhile following it."
" How many times a month do you change a tyre on a vehicle?" I asked.
"Oh!" he replied. "not once a month—sometimes not once in three months."
Then isn't it rather absurd," 1 said, "to be afraid of clerical work when, often enough, three months .go by between one entry and the next? "
" But," he asked, is it possible to keep the cost of tyres per vehicle merely by recording the cost of each tyre separately?"
" How that is-done," I answered, "is explained in detail in the book, and I would rather ask you to-read that than go into it in detail now, but. briefly, you will see that every time the tyre is moved from one vehicle to another, a note is made of it and of the mileage it has run on any particular vehicle. When the tyre is scrapped, you have on the card a statement of the totat mileage the tyre has run on all the various vehicles.. You also have information as to the total amount the tyre has cost, not only what it was bought for in the first place but what has been spent on it by way -of repairs and retreads. "If you divide the total Mileage into the total cost. you get the cost of that lyre per mile. If you know the mileage which is run on each vehicle and if you :multiply' that mileage by the cost per mile you. et the ekact amount to be debited on account of tyre wear -to that vehicle.
" You see, according to this card, £27 5s, 6d., call it £27 6s.. has been spread over these vehicles—to No. 5 vehicle £8 18s. 8d., to No.: 2, £10 4s. 5d., and to No. 4, 48 2s. lid. These three arnotints add tip to £27 es." '
Wait a minute," he said, "there is something wrong there. In the liSt of vehicles to which this tyre has been fitted there is a vehicle Nd-; 3 and there is nothing in your calculations relating to No. 3.
That is easily explained," I replied. " If you will read carefully you will find that this tyre was removed from
• vehicle No. 2 on February:2 and put on No. 3, but only as a spare: In eight days:that is on February 10. it was still on vehicle No. 3 as a spare, when it was removed and put on to vehicle No. 4."
"Well, I will have a shot at keeping iny records on a card such as this," he said. "Hy. the way, where do I get these cards?"
The best thingsto do is to make them up yourself out of postcards. Unfortunately, it would not do to take the figures on that card as being applicable to-day because of price increases."
The next matter I want to deal with is overheads or establishment costs.: There are still many operators who do not assess the amounts they spend on their business apart from the 'operating costs of the vehicles themselves.
Establishment costs and profit percentages run together and it is hardly less difficult to get operators to agree upon what is a fair percentage of profit than it is to get them down to a figure for establishment costs. Generally the idea is, of course, to calculate that percentage of profit, taking total expenditure as a basis.
Reference to figures will perhaps be useful. Take the case of a 7-8-tonner covering an average weekly mileage of 960. Assume that the weekly standing charge is £9, and that the running cost per mile is 6d. The total cost of operation for a week is' thus £33. What shOuld that vehicle earn if it is to show a reasonable net profit?
Marty hauliers believe that anything they receive over and above that £33 is net profit. There are, indeed, some who hold the opinion that some of that £33 is net profit, and quite a few who take less than £33 imagine that they are doing good business.
Inevitable Expenditure When T ask these men what provision they make for their establishment costs, the usual reply is that they are negligible, which is absurd. There are few operators who can escape any of the following expenses: telephone, telegrams, postage, billheads and envelopes, log sheets. licences, including the expense of obtaining them, making objections to others and meeting objections, fines and costs, bad debts, legal expenditure and accountants' charges.
Then there are other expenses, supplementary to the bare operating costs which are included in the £33 quoted above. They are not 'incurred by every haulier as not every class of business evokes them. I refer to such items as insurance
of the load, Wages of a second man, lodging allowance, cost of.sheets and ropes, and provision for goods storage in
transit. ..s..
It iis almost impossible to quote a universally applicable figure for these costs. It is not even the case that the total rises or falls as the numbir, of vehicles operated increases. There always comes a lime in the growth of the fleet when the haulier realizes that his overheads whilst irreducible are excessive in relation to the size of his Undertaking. He can perhaps double his fleet without materially adding to those overheads.
On the other hand, some kind of estimate is essential if we are to arrive at a proper basis for rates schedules. In particular branches of the industry. where overheads arc . notoriously high, as in Parcels traffic, or admittedly low; as in the cartage of sand and ballast, special provision carr. be made and rates assessed accordingly. For the general body of hauliers, however, it is sometimes convenient to make a percentage addition In the vehicle operating cOsts, sufficient to cover establishment costs and to allow for a reasonable net profit.
That, practice has been followed for many years with, ,
hoWever, considerable changes in the percentage allowance. In the earliest days of the industry, at a time when "The Commercial Motor" Tables of Operating Costs were first published, it used to be the practice to add 100 per cent. to the vehicle operating costs.
Later, a method was adopted whereby 50 per cent. was added to the operating costs, thus arriving at the figure for earnings. In the case cited above, for example, in which the vehicle operating cost is shown to be £33, an addition of £16 10s. would be presumed to be enough for gross profit. and gross profit, is taken as providing for establishment costs and net profit. The minimum revenue for a 7-8-ton oil-errgined vehicle covering 960 miles per week would be £49 10s, " Recommended Earnings When I introduced that method I arrived at the 50 per cent. by estimating establishment costs as being 25 per cent. of vehicle operating costs and assuming that the net profit should be 20 per cent. of the total expenditure, that is, operating costs plus establishment costs. Thus, if the vehicle costs were MO, I added £25 kit overheads. That would bring the total expenditure to £125. Add 20 per cent, of that sum, which is £25, for profit. and the total minimum recommended earnings would be £150, which is 50 per cent. over and above the vehicle operating costs.
The defect of that method was that it tended to make excessive provision for overheads when the weekly mileage was high, and perhaps not enough either for overheads or profit when the weekly mileage was low.
In the case just discussed, for example, 25 per cent. of the total cost of 03 would be £8 5s, per week, which even
would regard as excessive. If, however, the vehicle was running only 360 miles per week, then the total cost would be made up of standing charges ER per week, as before, plus the running cost of 360 miles at 6d, per mile, nearly £9, a total of £18 per week. In that case, provision for establi:shment costs would be £4 10s., which is perhaps
reasonable. S.T.R.