THE WHY AND WHEREFORE OF COSTS.
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Some Suggestions for Ascertaining the Operating Costs of Commercial Vehicles and for Making Good Use of Those Costs When Found.
• n-NE of the most exasperating of the O of with which early commercial vehicle salesmen had to contend was that of meeting arguments which turned on cost of operation. Prospective customers would puzzle them with inquiries concerning cost and ask for figures relating to the new method of transport. -Then, if you please, they would barefaCedly confess that they had none of their own and could not offer figures for horse transport in order to allow fair comparisons to be made. As time went om, however, it became evident that this, seemingly, peculiar attitude towards accounts keeping • in respect of transport was not limited to those who relied mostly upon
horses. • As the motor vehicle became more and more widely employed it transpired that very rarely indeed did users trouble themselves about the cost of its operation. It Would almost seem as though the concern for cost of operation, so live and pressing at the time when commercial motor transport was being recommended, was merely put forward just to try the salesman or even to put him off while the prospective customer thought out some fresh excuse for delaying his inevitable investment in this new method of transport, as is often done by persons with conservative ideas.
Users Reluctant to Record Costs.
That state of affairs persists, so far as the majority of motor-vehicle owners is concerned, to this day. There are some who enter any expenditure on transport as a separate item, but very few indeed who keep track of that expenditure -week by week so that they may iminediately become aware of any .upward tendency and thus be able to ascertain the cause of that increasing cost, with a view to eliminating it. Where only one vehicle is used it is, perhaps, sufficient in a general way if this procedure be followed and so long as the cost is checked at regular and fairly frequent intervals the requirements of the ordinary business man are met, except that, in the event of the costs seeming to be excessive he is unable to discover the cause; because he is without details and -cannot find in which . way excessive expenditure is being caused.
When more than one vehicle is in use we are emphatically of the opinion that this go-as-you-please method of keeping costs of transport is a mistake. In point of fact, however, there are still many users of heavy motor vehicles, some of them owners of fleets, who would be entirely unable to pick out from their accounts the actual cost of their transport let alone be able to
differentiate between the performance of the various vehicle units of that fleet.
There is a host of reasons why care should be taken to keep track not only of the costs of operation of each individual vehicle of a fleet but of the separate items of expenditure of which that cost is composed. There is, fcr example, a vast difference in the costs of running of various makes of vehicle.
So real is this difference that experi . enced users who have gone to the • trouble of compiling accurate records of coats have found it worth while to dispense entirely with certain units of their fleet and to buy new ones in order to effect economy. They have been persuaded to do so because the costs of operation of the discarded units was so excessive as to make that, seemingly extravagant, change worth while. It has been found, too, in this way that it is usually much more economical in the long run to pay higher prices for well-found vehicles of reliable make than to endeavour to save on capital expenditure by buying either lowerpriced new machines or investing in doubtful second-hand ones.
The savings effected make themselves apparent in a good many ways. As might be expected, the cost of maintenance is one big factor; the rate of depreciation is another, whilst tyre C33
manufacturers are insistent that some makes of commercial vehicle are very much harder on tyres than others.
A case in point was brought to our notice recently. A concern using a fairly large fleet, after a period in which its purchases had been confined to a high-class vehicle, decided to make a change in favour of another, because it could in that way effect an economy in first cost approximating to £200 per vehicle. The experience with the older machines had been such as to confirm it in the habit of taking a period of eight years as the life of each machine. It considered, therefore, that by cutting the initial cost to the extent of £200 it would be able to effect a saving of £25 a year in depreciation and a further £10 a year as interest on first cost.
Independent Cost Records.
Now, this concern, like so many other big users, was in the habit of keeping accounts of its transport department as a whole, but had no records of the performances of individual vehicles. The maker of the more expensive type of machine being, naturally, concerned at the loss of custom he was suffering, was confident that, given accurate accounts-keeping, he would be able to show that, notwithstanding the higher price of the vehicle he was selling, his was the more economical proposition, and he was, fortunately for him, able to persuade this user to start keepinst independent records of the 'cost of operation of each of the vehicles. He • was thus able to show that, taking the cost of operation over a considerable period, the higher-priced machines effected an economy of no less than 5d. per mile as compared with the cheaper vehicles.
Now the average mileage of each vehicle of that fleet was 12,090 per annum, so that 5d. a mile • represented an economy of no less than £250 a year. Setting against this the saving of £35 a year arising from the .lower first cost of the cheaper vehicle, a net advantage of £215 was shown in favour of the snore expensive machine.
The point I am trying to make is that had this user not been persuaded to keep records of cost of operation of individual machines he might never • haye discovered how much better it was for him to buy a more expensiVe vehicle.
Where the Difficulty Lies:
There can be no doubt that one of the reasons for this persistent reluctance to keep accurate costs records is their complication. There is, moreover, a lack Of appreciation of the number of items that goes towards the expenditure which is involved, largely because whilst some of them are of frequent, almost daily, occurrence, others may not recur for periods of a year or more. Then, again, where more than one vehicle is kept, it is difficult to know how to ensure that expenditure is properly debited to the vehicle concerned. The following notes are intended to help to solve that difficulty.
In the first place, it is necessary that each vehicle should be treated, so far as possible, on its own, and to that end the first thing to do is to compile a separate register for each vehicle, ernbodying all such information as is necessary to identify it, not only for purpose of cost records but for such
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things as completion of forms of application for licence, communicating with the manufacturer concerning the vehicle, the filling up of insurance policies and the making of claims on
insurance companies. If all this information be kept together it is easily accessible in case of need.
Recurring Expenditure.
The next thing to do is to make some proper note of those fairly heavy items of expenditure 'which recur regularly at long intervals. These are the renewal of insurance premiums and the annual licence. With them should also be included an item for the interest on the firat cost of the vehicle and the annual rent and rates of the garage in which it is housed. If several vehicles be kept in the cue building it will, of course, be necessary to allocate a proportion of the rent and rates relating to that building to each vehicle. These four, together with the wages of the driver, comprise .what are called the
'standing charges:" The reason for the name is Obvious. They are items of expense which do not vary with the mileage which the vehicle is covering. In order that the total cost of operation of the vehicle may'. be known fairly closely at any time, it is advisable' to set these records in such a way that, side by side with theitoannual amounts, mak he noted their incidence as weekly charges_ This figure, of course, can 'be' ascertained by dividing the total for. the year by 50 or 52.
About the Tyres.
.The most difficult item to record in such a way as to make it completely useful is the cost of tyres. The compilation of this information may be regarded as having possibilities of usefulness in two ways. It is, first of all, of course, essential as an item of operating cost, but, considered in that light alone, it would be sufficient merely to enter in the accounts for each vehicle the oxpenditure on new•tyres and on repairs to old tyres, as that expenditure occurred. There is a .further possible object, however. The user may desire to compare the performances of different makes of tyre on the same or different vehicles and if he wants that information he will have to compile a tyre register in which for each and every tyre he will have to enter information as to the date fitted and the make, the wheels to which the tyre is fitted, as well as when it is removed and, possibly, again refitted, its cost, the date when scrapped and the mileage it has done. There will have to be a separate tyre register for each vehicle and the register will have to be completed from time to time as the information becomes available.
The Daily Expenditure.
One special item which must appear on the register of the vehicle to which I referred earlier in this article is that of depreciation. This must be calculated as an amount per mile Tull, so that it can be treated as an item of running cost. It can be assessed by subtracting the cost of a set of tyres from the initial cost of the vehicle as a whole and dividing the result by 150,000, the assumed life of the machine. That figure, the depreciation per mile, should be recorded on the register and then
used each week to mark the depreciation during the week according to the distance run. To keep track of current expenditure a weekly log book is necessary, in which should be entered each .day the amount of petrol measured out to each vehicle and its cost, the oil which it uses and its cost, as well as any sundry stores. At the end of the week this expenditure should be totalled and summarized. The weekly charges should be taken from the register of standing charges and added, as well as an estimated proportion of tyre costs, the depreciation and any workshop charges. These will give the total costs of operation for that week. By dividing into that figure the mileage Covered during the week, the cost per mile will be indicated.
Using Costs.
The foregoing information will be enormously useful, as I have pointed out, for differentiating between the costs of running of different vehicles of a fleet., It is valuable, too, because any modification. in cost is immediately noted and any unnecessary waste can be scotched. It also acts as a check upon the efficiency of the various drivers.
As to the use of the figures in enabling the owner more closely to approximate his costs of Prod-action, differences must inevitably arise according' to the business upon which he is engaged and to the goods for the transport of which he needs these vehicles. The man who is chiefly concerned with the cartage of road material, bricks, coal and loads of that kind, will find the assessment of the cost of carriage fairly easy. lie will naturally keep a record of the number of loads and the distances. The total costs of running -the vehicle for a week divided by the number of fully loaded miles will afford him the figure and the cost of each load. The user whose goods are put up in small parcels will, if those parcels be all the same size, be just as happily placed in ascertaining the cost per parcel. He will only need to find the cost of each load in accordance with the procedure outlined above and divide 'that figure by the number of parcels pet load to discover hoiv Much it is costing 'him. to deliver each parcel. •
Parcels of Varying Size.
Where the parcels vary in size the problem is a little More complicated. It .really startS as before by finding the cost per load and 'then the cost Per parcel. After, that, a certain amount 'of differentiation is necessary between one parcel and another, according to
size. • The haulage contractor; the man whose motor vehicle is really the machinery of his business and whose finished product is the carriage of somebody else' m goods, must always realize that these figures comprise the cost price for the commodity which he is selling, namely, the use of his vehicle. Oa to them he must add overhead costs. • —the expense of carrying on his business; selling costs—any expense to which he may go in advertising and other-wise obtaining business — and Profit. Not until he has considered all these four items can he arrive at a reasonably profitable contract price.